How Big A Dividend Will Abbott Pay After It Splits?

| About: Abbott Laboratories (ABT)

As of January 1, 2013 Abbott Laboratories (NYSE:ABT) will be split into two companies: a proprietary pharmaceuticals business, called AbbVie, with a new ticker symbol, ABBV, and a company retaining the Abbott name , focusing on medical devices, diagnostics, and nutritional products.

The transaction will take place as a tax-free distribution to Abbott shareholders of a new publicly traded stock for AbbVie. The stock distribution ratio will be determined at a future date. It is expected that the two companies will each pay a dividend that, when combined, will at least equal the current Abbott dividend at the time of separation.

The safety of a company's dividend rests on many factors, of which a most important one is the development and success of innovative new products.

Standing out among Abbott's many innovative products is the newly introduced plastic stent called Absorb.

The Absorb stent

Since September 2012 Absorb, the world's first drug-eluting bioresorbable vascular scaffold (BVS), has been available in more than 30 countries across Europe and parts of Asia Pacific and Latin America. Absorb is not yet approved for sale in the US.

Abbott calls Absorb a "scaffold," suggesting it is a temporary structure, unlike a metal stent, which is a permanent implant. The scaffold, which provides support to the blood vessel until the artery can stay open on its own, later dissolves naturally.

Like a metallic stent, Absorb works by restoring blood flow to the heart. It is made of polylactide, a naturally dissolvable material that is commonly used in medical implants, such as dissolving sutures.

Generally speaking, a stent is a small mesh tube used to support narrow or weak arteries. Stents are usually made of metal, but sometimes fabric is used in larger arteries.

Absorb is the first stent made of plastic for the treatment of coronary artery disease.

The potential benefits of a scaffold are significant. The vessel may expand and contract as needed to increase the flow of blood to the heart in response to normal activities such as exercising. Also treatment and diagnostic options are broadened, the need for long-term treatment with anti-clotting medications may be reduced, and future interventions would be unobstructed by a permanent implant.

Absorb completely dissolves in the body, except for two pairs of tiny metallic markers that help guide placement and remain in the artery to enable a physician to see where the device was placed.

Competing bioresorbable stents use other types of plastics.

The international launch of Absorb follows years of trials in more than 20 countries. According to Abbott, study data shows that Absorb performs as well as the best-in-class drug-eluting stent during major adverse cardiovascular events and target lesion revascularization.

Absorb is coated with a drug called everolimus, which inhibits in-stent thickening in the coronary arteries. This is the same drug used in Abbott's Xience coronary stent systems. Everolimus was developed by Novartis (NYSE:NVS) and licensed to Abbott.


A few companies have fallen behind Abbott in developing a similar stent and are trying to catch up.

San Diego based Reva Medical's ReZolve Bioresorbable Coronary Stent is also designed to restore blood flow and promote arterial healing, before gradually dissolving and leaving nothing behind. It is being tested in Brazil and Germany.

The ReZolve stent is designed to offer full x-ray visibility, providing clinically relevant sizing. In addition, the ReZolve stent may reduce the incidence of late-forming blood clots, a rare but serious problem associated with drug-eluting metal stents currently in wide use.

Reva uses a polymer technology originally developed at Rutgers University and the company is still working with researchers at Rutgers to improve the technology.

In addition to other payments, Rutgers is expected to receive royalties of $70 to $100 per scaffold sold once the product becomes commercial. In the meantime the Rutgers License requires annual licensing payments of $175,000 until the technology has been commercialized.

Boston Scientific Corp (NYSE:BSX), a major player in stents, was once an investor in Reva and now has an option to negotiate for a worldwide exclusive right to distribute its stent products. Another major medical device manufacturer, Medtronic (NYSE:MDT), is still an investor in Reva.

At the end of 2011, Reva's accumulated deficit was approximately $150 million.

Elixir Medical Corp. (Sunnyvale, CA)'s DESolve Bioresorbable Coronary Scaffold System is made from a PLLA-based polymer (poly-L-lactic acid) and coated with a polylactide-based resorbable polymer-drug matrix.

Elixir Medical is a privately funded company. The lead investor is the Invus Group, a New York-based equity investment firm with over $4 billion under management.

The DESolve Scaffold will soon be studied in a trial enrolling 120 patients in up to 15 centers in Germany, Belgium, Poland, Brazil, and New Zealand.

The Berlin based German company Biotronik is developing a second-generation Dreams magnesium-based resorbable stent.

Investor's summary

The much-anticipated split will start a new chapter for Abbott under Miles White, the company's chief executive since 1999.

Under White, Abbott has grown largely through acquisition, buying Knoll Pharmaceuticals for about $7 billion in 2001 to gain access to the blockbuster rheumatoid arthritis drug Humira. Among its other multi-billion-dollar deals was the purchase of Guidant's vascular device business, enabling the company to build up a heart device segment.

In 2010, Abbott completed more acquisitions, including that of Solvay Pharmaceuticals and Piramal Healthcare. This has allowed average annual growth in revenues of close to 20% in the past two years.

Also, Abbott is expanding into emerging markets in a big way. It has spent hundreds of millions of dollars on new manufacturing plants in India and China.

But for the future, White emphasizes "internal growth," focusing in particular on Abbott's nutritional products, such as the flagship infant formula Similac and adult nutritional products like Ensure and Glucerna.

At the separate company AbbVie, the business will focus on proprietary pharmaceuticals such as Humira, which is expected to lose patent protection in 2016. Humira's global sales were up 10 percent to $2.3 billion in the third quarter of 2012.

Humira is expected to drive sales at AbbVie to a peak of $18 billion. But AbbVie will most likely be hit hard by the generic competition when its various patents expire for products like Humira, Tricor, and Niaspan.

Under Rick Gonzalez, a long-time Abbott executive and designated CEO of AbbVie, the new company is banking on the future with several treatments in late-stage clinical trials, such as a drug to treat hepatitis C.

For the third quarter of 2012 Abbott reported earnings of $1.94 billion.

That compares to $303 million in the third quarter of 2011 when Abbott experienced a slew of restructuring and other costs related to the split into two companies.

Management says the combined dividend for the 2 companies will be at least equal to Abbott's pre-separation dividend. It is expected AbbVie will pay an annual dividend of $1.60 per share, starting with the quarterly dividend in February. This, like all dividends, will be subject to approval by the future AbbVie board in January 2013.

The new Abbott plans to pay a dividend of $0.56 per share, in line with its peer group and growth prospects, also starting in February and also subject to approval by Abbott's board.

This way the combined annual dividend rate of $2.16 for the 2 companies exceeds the current rate of $2.04.

The range of Abbott's share price for the past 52 weeks was $52.05 to 72.47 and the market cap of the company is $103.81 billion.

On their first day of independent operation, both ABT and ABBV will be Fortune 200 companies, and in the top ten in their respective industries.

They will both have broad product portfolios and global reach, with a very strong balance sheet and significant, durable cash flow.

Both are expected to be excellent long term investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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