Abbott Laboratories splits in two

Branded drug business to become separate company

10/19/2011

WASHINGTON — Abbott Laboratories, long known for selling a mix of drugs, medical implants and baby formula, said Wednesday it will spin off its branded drug business and become two separate companies with more distinct identities.

The split-up, announced Wednesday marks a dramatic change in strategy for the 123-year old company, which sells a broad range of products from stents to arthritis drugs to contact lens solution. While many pharmaceutical companies weathered losses as the patents on their blockbuster drugs expired, Abbott has continued to post double-digit sales growth, chiefly because of its anti-inflammatory drug Humira. The injectable drug posted sales of $6.5 billion last year.

But Abbott's reliance on the drug has been a concern for investors, overshadowing the company's performance across other businesses. Humira loses patent protection in 2016 and the company has largely been unsuccessful in developing new therapies to replace the drug.

CEO Miles White suggested Wednesday the split is about crafting two companies with clearer messages for investors.

"What happened here is the pharma piece got so big, and is so different, that these two investments make sense separately, and both are of a critical mass and size that they have great sustainability going forward as independent companies," White told analyst on a teleconference call.

Analysts said the split makes sense given that the company has evolved into two separate businesses, each with different strategies and outlooks.

"It makes sense for stockholders because it's a company with two very different risk profiles and investment propositions: high-risk drug discovery and lower-risk generics and nutritional products," said Erik Gordon, a professor and analyst at the University of Michigan's business school. "Investors will be able to pick the one they like or, if they like the old Abbott, keep both."

Company shares rose $2.09, or 4 percent, to $54.53 in morning trading.

Abbott, based in North Chicago, Ill., also reported a 66 percent decline in third-quarter net income as it set aside $1.5 billion for legal reserve related to an investigation into its marketing of the drug Depakote.

The new spinoff will sell Abbott's branded pharmaceuticals, including the blockbuster arthritis and immune-disorder drug Humira and the cholesterol drug Niaspan. The business, which has not yet been named, will be led by Abbott's Richard Gonzalez who currently heads the company's pharmaceutical business.

The new drug company would have annual revenue of about $18 billion, Abbott said, based on 2011 estimates.

White will continue to lead the rest of the medical products company, which sells generics drugs, medical implants, diagnostic tests and baby formula. This company will retain the Abbott name and would have annual revenue of about $22 billion. For the first time, nutritionals including Similac baby formula will be Abbott's largest business, accounting for 28 percent of remaining revenue.

The company said the split would allow investors to value the companies on their distinct characteristics.

"There is no question that both our research-based pharmaceutical and diversified medical product businesses have evolved over time in very different ways into two different, compelling investment identities," White said on a call with analysts.

Shares of the new company will be distributed to Abbott shareholders in a tax-free transaction, Abbott said.

Abbott is the latest in a series of companies to announce such split-ups in the past year, including Kraft Foods Inc., the former Fortune Brands Inc. and Sara Lee Corp.

Also Wednesday, Abbott reported net income of $303 million, or 19 cents per share, down from $891 million, or 57 cents per share, in the same quarter last year.

Excluding a big charge to set aside a $1.5 billion pretax legal reserve related to the Depakote investigation, earnings were $1.18 per share, which beat analyst expectations by a penny.

Revenue rose 13.2 percent to $9.82 billion. Analysts expected $9.63 billion.