Abbott Laboratories Inc (ABT.N) plans to split off its pharmaceuticals business into a separate publicly traded company to increase Wall Street's focus on the remaining diversified medical product line, lifting its shares 2 percent.
The new company will be run by Richard Gonzalez, the top drugs lieutenant to Abbott Chief Executive Officer Miles White, who will head the diversified products business that includes medical devices, diagnostics and nutritionals.
Abbott is the latest U.S. company to announce break-up plans, following giant energy company ConocoPhillips (COP.N), manufacturing conglomerate Tyco International Ltd TYC.N, Kraft Foods Inc KFT.N, credit rating agency owner and book publisher McGraw-Hill Companies Inc MHP.N and defense and industrial conglomerate ITT Corp (ITT.N).
Abbott's split may increase pressure on other diversified healthcare companies, such as Medtronic Inc (MDT.N), to examine potential separations.
White said Abbott has always believed in the diversified model, but that many investors now identify it as a pharmaceuticals company.
"We've become so successful in our proprietary pharmaceuticals business -- it's grown quite large," White told analysts on a conference call.
Abbott shares have been held back for years on concerns the company is too dependent on its flagship rheumatoid arthritis drug Humira, one of the world's top-selling medicines at more than $8 billion a year. Humira, an injected drug, is facing growing competitive threats, including possible cheaper generic versions and a pill being developed by Pfizer Inc (PFE.N).
Abbott's earnings grew 12 percent in 2009 and 2010 and are on track for double-digit growth this year. Despite being at the industry's top tier of growth, many analysts say Abbott shares are undervalued due to Humira's perceived vulnerability.
"That problem hasn't gone away; it's going to be worse in the pharma spin, but at least the rest of the company can now be valued on its own merits," Nuveen Asset Management healthcare analyst Tim Nelson said.
White denied the move was about lacking faith in Humira.
"This split is not around confidence in Humira," White said. "It's about the identity of the businesses."
The new pharmaceutical company is likely to be an attractive acquisition target "within the next round of industry consolidation, which we expect to occur in the 2012-13 timeframe," Jefferies analysts said in a research note, naming Merck (MRK.N), Roche ROG.VX, AstraZeneca (AZN.L) and Bayer (BAYGn.DE) as potential buyers.
Abbott also reported a 66 percent drop in third-quarter net profit on Wednesday, due to a $1.4 billion after-tax litigation charge. The charge relates to the company's attempts to settle a U.S. federal investigation into marketing of its Depakote anticonvulsant drug. Excluding the charge, third-quarter results slightly topped Wall Street forecasts.
MORE HUMIRA RUNWAY?
The new pharmaceutical company would have nearly $18 billion in annual revenue. Aside from Humira, its medicines include HIV treatment Kaletra and prostate cancer drug Lupron.
Humira "has plenty of runway left," said Gonzalez, who is currently Abbott's executive vice president of global pharmaceuticals. He noted the drug is being tested for new uses that could continue to propel sales.
Gonzalez, 57, first joined Abbott in 1977, and previously served as the company's president and chief operating officer.
The diversified products company to be run by White, 56, who has led the suburban Chicago company since 1998, will retain the Abbott name.
That company has about $22 billion in annual revenue and includes its market-leading Xience heart stent as well as generic medicines -- low-cost copies of drugs that have lost patent protection that Abbott sells in emerging markets.
The diversified company will target double-digit ongoing earnings-per-share growth, while looking to expand in emerging markets, Abbott said.
White said both companies have potential for higher profit margins, especially the diverse products company. He added that Abbott has been considering such a split for a few years, but had ruled out selling off its businesses.
Pfizer is exploring whether to sell or spin off its nutritionals and animal health units, while other pharmaceutical companies, including Eli Lilly (LLY.N) and Bristol-Myers Squibb Co (BMY.N), have divested medical device and other non-pharmaceutical units in recent years.
Abbott itself spun off its hospital products business into a separate company, Hospira Inc HSP.N, in 2004.
Several drugmakers, particularly in Europe, have sought to diversify as they face patent expirations to top medicines, while Johnson & Johnson (JNJ.N), to which Abbott has often been compared, consistently touts the benefits of diversification.
Abbott's new pharmaceutical company, yet to be named, will be created from a tax-free distribution to Abbott shareholders, but the expected stock distribution ratio has not been set.
It is expected that the two companies will each pay a dividend that, when combined, will be equivalent to the current Abbott dividend at the time of separation. The company expects to complete the split by the end of 2012.
Morningstar analyst Damien Conover said portfolio managers often prefer more focused companies so they can diversify their holdings on their own. He said the split may increase clarity on the businesses.
Abbott net earnings dropped to $303 million, or 19 cents per share, dragged down by the Depakote charge. That compared with $891 million, or 57 cents per share, a year ago.
Excluding special items, Abbott earned $1.18 per share, a penny ahead of the average expectation of analysts, according to Thomson Reuters I/B/E/S.
Global sales rose 13 percent to $9.82 billion, above Wall Street expectations of $9.64 billion.
Abbott shares rose $1.05 to $53.49 in afternoon trading on the New York Stock Exchange, where they earlier touched $55.55.
(Reporting by Lewis Krauskopf and Ransdell Pierson in New York, additional reporting by Ben Hirschler in London; Editing by Dave Zimmerman, Maureen Bavdek)