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Are Two Abbotts Better Than One?
Abbott Laboratories (ABT) recently made the significant strategic decision to split into two separate companies. The diversified, global pharmaceuticals industry leader has traditionally been viewed as a safe, defensive-type company, but has evolved in recent years with aggressive deal making and significant investments in higher-growth emerging markets. Thus, the corporate restructuring represents a logical step in the ongoing evolution of Abbott. Under the terms of the deal, the company plans to spin off its proprietary pharmaceuticals business in a tax-free transaction to shareholders. Although many of the details have yet to be released, the spin-off transaction is expected to be completed by the end of the year.
The breakup would result in the creation of two standalone entities; a diversified medical products company and a proprietary pharmaceuticals company. The pharma business includes the company’s branded pharmaceuticals portfolio, led by the blockbuster drug Humira, as well as a diversified development pipeline. This new company, which has yet to be named, will be led by Richard A. Gonzalez, the current executive vice president of Global Pharmaceuticals. The pharmaceutical business accounted for $17 billion in sales (44% of total) in 2011, led by Humira (47% of segment sales), with smaller contributions from a number of other products including TriCor/Trilipix, Kaletra, and Lupron. Meanwhile, the diversified medical products company will retain the Abbott name, and will be comprised of its devices, diagnostics, nutritional and branded generics businesses.
The separation of the two businesses makes a lot of sense, considering the fact that they have very different characteristics and growth profiles. The pharmaceuticals unit is a more mature business that is currently dominated by Humira. The flagship $8 billion drug has actually been an overhang for the stock due to investor concerns regarding potential competition and its future growth rate. Thus, the spin-off should enable both of the companies to receive valuations that accurately reflect the individual businesses and growth prospects. In contrast to the pharma business, which seems poised for a mid-single-digit average-annual growth rate over the next 3 to 5 years, the medical products business could achieve a higher, double-digit rate.
The medical products business’ stronger growth profile is bolstered by significant exposure to emerging markets. Abbott has invested heavily in higher-growth emerging markets like India through a combination of acquisitions and expansion. Indeed, M&A has played a large role in strengthening Abbott’s positions in attractive international markets. Large acquisitions, including the $6.2 billion Solvay Pharmaceuticals and $3.7 billion Piramal Healthcare deals, have helped rapidly expand its foothold in these regions. Emerging market sales improved 25% in the fourth quarter of 2011, and accounted for 24% of company revenues. Notably, emerging markets would account for approximately 40% of the medical product company’s sales.
In addition to the potential benefits to shareholder value from separating the two distinct businesses, the spin-off should result in broader interest from investors. Both companies are expected to pay dividends, with a combined total that is equal to the current payout. Historically, ABT has been known for its solid dividend yield and perception as a conservative, safe investment. This has attracted income-seeking, conservative investors, while overshadowing the recent ongoing business transformation. However, the spin-off should create two stocks with unique appeal, as shares of the new proprietary pharmaceuticals company ought to appeal to the “traditional ABT” investor base that is primarily focused on yield and safety. Meanwhile, shares of ABT (the remaining higher-growth medical products company) would likely be more attractive for growth investors. This benefit alone could potentially improve the stand alone valuations of the companies. Both businesses have attractive long-term prospects, and we believe that the spin-off transaction should serve as a catalyst to help unlock shareholder value.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.