News that Abbott Labs (ABT) will divide itself into separate drug and medical device companies follows a familiar pattern that has proven highly profitable in the past.
A similar break-up came in 1994 when Eli Lilly (LLY) spun-out its medical device business as Guidant. Guidant later became part of Boston Scientific (NYSE:BSX) in a $24.2 billion deal. The deal didn't work out for BSX, but Lilly shareholders who kept both stocks did very well.
In the Lilly case it was the devices business that was spun-out, while in Abbott's case it will be the drugs business that is seeking a new name. This means Abbott is keeping its own consumer products, including diagnostic kits and baby formula, creating a pure-play drug company that itself might be available to be taken-out.
The unit may be attractive for its patents on such drugs as Humira, Tricor and Zemplar, although its Niaspan time-release niacin product was hit hard recently by research indicating it does not prevent death. Abbott also has an HIV drug, Keletra, whose patent has been rejected in India.
Our Todd Campbell notes, however, that Abbott's pipeline is on a hot streak, with Bardoxolone for kidney disease, ABT-450, and Duodopa for Parkinson's all making steady progress.
What history says is hanging on to ABT to see what happens with the drug unit could prove highly profitable.
The Abbott decision leaves one gigantic drug-pharma-devices company still struggling for synergy. I would be remiss in not mentioning it.
Johnson & Johnson (JNJ) lists a half-dozen pure device companies among its device & diagnostics holdings, and the fact that the stock is trading little-changed from 10 years ago could prompt a move of some kind.
The company's April acquisition of Synthes for $21.3 billion helped drag down third quarter earnings, its top medical device executive has gone to rival Boston Scientific and shareholders have a right to be impatient.
I want to emphasize that there is no evidence JNJ is interested in breaking up. But my guess is executives, and shareholders, there will be watching closely to see what happens with ABT's total valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.