Abbott (NYSE:ABT) recently announced they would split the company into two separate, publicly traded businesses, effective January, 2013. The “new” company will be dedicated to “research-based pharmaceuticals”. The existing diversified medical products company will keep the Abbott name and the current Abbott CEO, Miles White. Richard Gonzalez, the current head of Abbott pharmaceuticals will become the Chairman and CEO of the new, as yet unnamed, pharmaceutical company. The split will be accomplished through a tax-free distribution to ABT shareholders of a new, publicly-traded stock in the pharmaceutical business.
The pharmaceutical business will have sales of about $18 billion, about half of which will come from Humira, a drug for inflammatory auto-immune diseases such as Crohn’s disease and rheumatoid arthritis. The Humira patent expires in 2016.
The medical products company will have sales of about $22 billion, consisting of four large divisions – nutritionals, diagnostics, devices (stents), and generic drugs. Higher profits come from the pharmaceutical piece. Higher growth from the medical products piece. About 2/3 of the sales of the medical products company will come from outside the U.S., and 2/3 of that will be in fast-growing emerging markets. Those businesses have been growing at a 13% rate.
Abbott has said that the total, combined dividend from the two companies at the time of separation will equal the current dividend. We won’t know for a while what the different dividend yields will be, nor their future growth rates.
The market has been very enthusiastic about the split up. Abbott’s stock rose on the news, and has stayed higher than before the announcement. Most of the nearly 30 analysts who follow ABT have updated their ratings and outlook since the announcement, and all have either maintained a positive rating, or improved it. We are also very positive on the split.
The pharmaceutical industry is undergoing a very difficult strategic transition from selling (relatively) inexpensive pills to millions of patients for the rest of their lives to treat chronic diseases like hypertension and diabetes, to selling incredibly expensive treatments (e.g. Humira therapy costs about $20,000/year, and that’s a relatively cheap biologic drug!) to only a few thousand patients, often for six months or so. Pharmaceutical companies also have a big challenge from the increasing pressure governments and insurance companies are putting on the industry to lower prices.
The diversified medical company has products that are much less regulated and have fewer pricing problems. Further, those products are often each used for a larger number of patients, diminishing the per patient costs. With lower annual costs of therapy, these products also can often sell more in developing economies like China, Brazil, and India than high-priced prescription drugs.
Abbott’s Board apparently decided that the two separate pieces of their business would do better if they stood on their own and could focus exclusively on their very different market and business dynamics. The success of both Bristol-Myers (NYSE:BMY) and Mead Johnson Nutrition (NYSE:MJN) after a similar split a few years ago no doubt also influenced Abbott. Significant additional shareholder value was created by the BMY/MJN split.
We feel very good about the prospects of both parts of Abbott. Although, as you have no doubt picked up, we favor the medical products piece over the long term. The big unknowns for us, however, are what dividend each company will pay and what policy they will adopt for annual dividend increases. Abbott has long been one of our Rising Dividend stars, offering a 3.6% yield, paying an annual dividend without a break for roughly 100 years, and increasing their dividend every year for the past 40 years. We hope the new Abbott will carry on this enviable track record, in addition to the Abbott name and management team. But of course, no one knows.
So, this is a bit of a bet for us…at least as close to a stock market bet as we conservative types get. However, the market’s reaction, the example of BMY and MJN, and Abbott’s very long history of business success and rising dividends caused us to decide to increase our position in ABT in anticipation of the split.
Disclosure: I am long ABT.