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By Marie Daghlian

Abbott Labs (NYSE:ABT) says it plans to separate into two separate publicly traded companies, a diversified medical products group and a research focused pharmaceutical company. Investors reacted positively, sending shares up 4 percent on the news.

Abbott Laboratories has embraced diversification over its 123-year history. Indeed it has worked hard to build up its various businesses in medical devices, diagnostics, nutritionals, generics, and proprietary pharmaceuticals. But its branded drug business has become so successful—mostly due to sales of its flagship rheumatoid arthritis drug Humira—that the company has been increasingly thought of as a pharmaceutical company.

This has held back its shares, as investors have tied the company’s value to its branded drugs business, primarily the $8 billion in expected sales to be generated by Humira this year. And the pharma division’s investment and business opportunities differ from those of the medical products divisions.

However, less than half of Abbott’s $40 billion annual revenue comes from pharmaceuticals, and although the company has always believed in a diversified model, management sees a separation of the businesses as a way to increase shareholder value for all of its divisions.

“We’ve always pursued a diverse model and we have been very successful in our proprietary pharmaceutical business over time—it’s grown quite large,” Abbott CEO Miles White told analysts in a conference call. He expects the pharma division, with $18 billion in annual sales, to be successful going forward, but it had become too dominant in the portfolio and overshadowed the company’s other divisions, which have different risk and growth profiles, he said.

Another driver for the split is the increase in the international portion of Abbott’s revenues, which have grown to 60 percent of total revenue. White noted that international sales have doubled, especially with its rapid expansion in emerging markets through the acquisitions of Solvay and Piramal Healthcare Solutions and the creation of its Established Pharmaceutical Products division. The acquisition of Piramal in May 2010 for $3.7 billion made Abbott the largest drugmaker in India, one of the fastest growing markets.

Abbott will retain its name for the diversified medical products company, which has approximately $22 billion in annual revenue and a mix of products across four major businesses. Abbott expects double-digit growth in earnings per share, driven by continued expansion in emerging markets that already contribute 40 percent of total sales. White will remain the chairman and CEO of the new Abbott.

Richard A. Gonzalez, currently executive vice president, global pharmaceuticals, will become chairman and CEO of the research-based pharmaceutical company, which currently has $18 billion in annual sales and will focus on critical unmet needs in developed markets. Besides a strong portfolio of marketed drugs including Humira, it has a pipeline of more than 20 new compounds or indications in mid- and late-stage development.

Abbott’s split in two will take the form of a tax-free distribution to shareholders of a new publicly traded stock for the new pharma company and is expected to be completed by the end of next year. White said both companies are large enough to be successful on their own, with good cash flows and strong pipelines. The new Abbott, the diverse products group, will be successful in emerging markets, while the yet-to-be-named pharmaceutical company is a developed market game, he said.

Source: Abbott's Split Into Two Companies To Increase Shareholder Value Pleases Investors