Abbott Labs Spinoff Looks Like the Right Move

by Barry Cohen | December 13, 2011 10:50 am

Abbott Laboratories (NYSE:ABT[1]) continues to deny that the prescription pharmaceutical business it plans to spin off into a separate company is for sale. Then again, how many times have we heard the owner of a pro football team state emphatically that his coach’s job is secure, only to can him a day later?

Money talks, and perhaps Abbott could have a change of heart if one of the pharmaceutical giants is willing to give the company a boatload of cash for a business that not only has a promising pipeline, but owns leading brands in immunology, HIV, cystic fibrosis and thyroid disease, among others.

But it may prove better for investors if the new pharmaceutical company remains independent and gets a chance to show what it can do on its own. Shareholders will certainly jump for joy if Abbott duplicates the success enjoyed by Mead-Johnson (NYSE:MJN[2]) and Bristol-Myers (NYSE:BMY[3]). Mead-Johnson’s shares have just about tripled since it was spun off by Bristol in 2009. The spinoff also has been rewarding for Bristol shareholders, who have seen the value of their investment grow by more than 50% in the same period.

Earlier this month, at a Financial Times conference in London, Abbott CEO Miles White gave what FiercePharma said was a “circuitous nondenial[4] that a buyout could be worked out–for the right price.”

While stating that the pharmaceutical company wasn’t for sale, White also hedged a bit. He evoked memories of The Godfather, when he said he would have to listen if someone came to him with an offer he couldn’t refuse.

But what would be most advantageous for investors — to own shares in both companies post-spinoff or for Abbott to sell its brand-name drug business and perhaps distribute the cash to via a one-time dividend? In this case, good things might come to those who wait. The pharma business has a lot of promise.  It’s led by the flagship arthritis drug Humira, which rakes in an estimated $8 billion a year. Moreover, it has a bright future in the fast-growing emerging markets, where sales are projected to grow some 50% by 2015.

Of course, with any pharmaceutical company the great unknown is whether the drugs currently in the testing phase make it to market and prove successful.  The new pharmaceutical company looks to have a solid pipeline, with 32 compounds in human trials, 15 biologicals in development and more than 20 compounds in Phase II or Phase III.

The company also is exploring new indications for Humira that could result in more than $1 billion in peak incremental sales. Also in development[5] is daclizumab, which appears to be both safe and effective in treating the most common form of multiple sclerosis.

Phase III testing is also underway for bardoxolone, which is the first and only drug so far to show the potential to reverse kidney disease. Chronic kidney disease affects 50 million people in the U.S. and in Europe, according to Abbott, which obtained bardoxolone last year from privately held Reata Pharmaceuticals.

On Monday, Abbott made another big bet on Reata, making a one-time license payment of $400 million to collaborate with the Texas-based company on its class of oral anti-inflammatory drugs.

While the promise of a big cash payment for Abbott’s pharma business may be appealing, investors looking for an even better return might want the company to proceed with the spinoff.

Source URL: https://investorplace.com/2011/12/abbott-labs-spinoff-looks-like-the-right-move/

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