Abbott Labs (ABT) plans to split into two companies by the end of 2012. There will be the proprietary pharmaceutical business with $17.4 billion in annual revenue and the other businesses of nutritional products, diagnostics established pharmaceuticals, medical devices (vascular care, diabetes care, medical optics and animal health) with $21.5 billion of annual revenue. The revenue figures are for the year-ended December 31, 2011. The nutritionals business had 2011 revenue of approximately $6 billion. This business was buried within the $38.8 billion company and only represented 15% of revenue and 7.2% of operating profit. If the separation had occurred in 2011, the nutritionals business would have represented 28% of revenue and 21% of operating profit in the new company. This is based on the segment reporting information in the company's 2011 annual report (see link). In other words, the nutritional business is a much larger piece of the pie when one eliminates the proprietary pharmaceutical business.
The nutritional business consists of pediatric and adult nutritional products, which are sold throughout the world. The infant formula brands include Similac and the adult brands include Ensure. Pediatric nutritional sales as disclosed in the 10-K were $3.2 billion in 2011 and include more than $1.9 billion of international sales. The international business more than doubled since 2006 when sales were $0.9 million. The company does not disclose operating profit for the pediatric nutritional business, but the overall nutritionals division had operating margins of 13.3% in 2011, which have been trending lower in recent years from as high as 28% in 2006. The margin declined to 19.5% in 2007 and has steadily declined to 13.3% in 2011. This includes the adult nutritional business, therefore, it is not possible to determine the exact margin of the pediatric nutrition business.
Abbott's nutritional business is currently hidden inside a medical conglomerate with a market capitalization of $96 billion. Investors can assess the value of this business by reviewing Mead Johnson Nutrition which is a publicly traded pediatric nutrition company. Investors can also review the recent sale of Pfizer's pediatric nutrition business to Nestle. These businesses are comparable in size to Abbott's pediatric business, however, they don't have the added bonus of the adult product lines.
Pfizer (PFE) announced the divestiture of its nutrition business this week to Nestle (NSRGY) for $11.85 billion (see press release). This business represents a full line of infant and toddler nutritional products as well as formula for infants with special nutritional needs. The division had 2011 revenue of $2.1 billion which was entirely derived from outside the United States. Operating profit was not separately stated in the Company's 10-K filing. Bloomberg quoted the purchase price at 19.8 times 2012 EBITDA (Bloomberg article). The same article also noted that the business derives 85% of revenue from emerging markets. The Nestle purchase price equates to approximately 4.95 times revenue.
Mead Johnson Nutrition (MJN) had revenue of $3.7 billion in 2011 with an operating profit of $0.8 billion (operating margin of 21%). The business is mostly international with $2.4 billion in 2011 revenue or 65% of the total. The company had a market capitalization of approximately $16.9 billion on April 25, 2012. This is 7% less than 4.95 times revenue which is consistent with the valuation of the Pfizer transaction described above.
If one were to value Abbott's pediatric business at 4 times revenue, it would be worth approximately $12.8 billion. The adult business with revenue of $2.8 billion would also add value to the transaction and likely push the total nutritional business north of $15 billion. This would include a nutritional business with excellent emerging market growth prospects and a solid profile for adult nutritionals given the aging population of developed markets. I used a lower revenue multiple than Pfizer and Mead Johnson due to the apparently lower operating margin of Abbott's division. As mentioned before, it is not possible to determine the pediatric nutritional margin given the fact that the division also includes adult nutritional products. I am assuming that the adult business has a lower profit margin than the pediatric business. Of course, investors will need to scrutinize the margin deterioration for Abbott nutritionals during the past several years. This will likely be more apparent once financials become available for the new company.
While the nutritional business may get lost within the company's current portfolio of businesses, it will have an opportunity to shine after the split. A $1.9 billion international pediatric business that doubled in the past 6 years may get much more respect in a $21.5 billion company than a $38.8 billion company. Of course, investors must also analyze the other divisions within the new Abbott (non-proprietary pharmaceuticals).
Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions.
Disclosure: I am long ABT.
