Bloomberg News

Abbott Spinoff May Fetch $54 Billion as Humira Tempts Rivals

October 20, 2011

(Updates shares in the 11th paragraph.)

Oct. 20 (Bloomberg) -- The breakup of Abbott Laboratories into two companies will create a prescription-medicine spinoff that may become a $54 billion target for drugmakers looking to rejuvenate their flagging portfolios.

The Abbott Park, Illinois-based company said yesterday it will split next year, with one company selling medical products and the other prescription medicines. Powered by Humira, an anti-inflammatory with $6.5 billion in annual sales, the new drugmaker may attract bids from Merck & Co., Roche Holding AG or Bayer AG, said Jeffrey Holford, a Jefferies Group Inc. analyst.

At a time when many companies face declining sales as patents end on top-selling products, Humira won’t face generic rivals until at least 2017. Abbott also has experimental drugs for kidney disease, hepatitis C and multiple sclerosis nearing the market, though none will likely match Humira’s sales.

The drug spinoff “is likely to be an attractive target,” said the London-based Holford in a telephone interview. “This will be a fairly clean, stand-alone unit, the type that gets picked up.”

The breakup will create a pharmaceutical business with revenue worth about $18 billion this year, led by Humira and the AIDS drug Kaletra, Abbott said in a statement. The second company, which would keep the Abbott name, will sell heart stents, infant formulas, generic drugs and other products expected to bring in $22 billion this year.

$45 Billion

The prescription business may be worth $29 a share, Holford said. That would place its value at $45 billion, based on 1.55 billion Abbott shares outstanding. Jami Rubin, a Goldman Sachs Group Inc. analyst in New York, puts the price higher, at $54 billion, with a greater value possible depending on how much the company may save through cost cutting.

Either estimate would value the operation between Bristol- Myers Squibb Co. of New York on the high side and Eli Lilly & Co., of Indianapolis.

Roche, with 8.26 billion Swiss francs ($9.81 billion) in cash and short-term investments as of June 30 according to Bloomberg data, would be a likely suitor, as would Bayer, which reported 3.84 billion euros ($5.6 billion) in cash and investments, Holford said. Basel, Switzerland-based Roche needs new products, while Bayer, of Leverkusen, Germany, has said it’s looking for acquisitions, he said.

Merck, of Whitehouse Station, New Jersey, and London-based AstraZeneca Plc may also be potential bidders, he said.

Shares Rise

Daniel Grotzky, a spokeswoman for Roche, Guenter Forneck, a spokesman for Bayer, and Abigail Baron, a spokeswoman for AstraZeneca, declined to comment. Ian McConnell, a Merck spokesman, also declined to comment.

Abbott shares rose 1.5 percent to $54.05 at 4 p.m. The stock had gained less than 1 percent in the two years before yesterday’s announcement, even as the Standard & Poor’s 500 Health Care Index rose 10 percent.

The chief prize for any bidder would be Humira, Rubin said in a telephone interview. She expects the drug to bring in $11 billion in sales by 2016.

The treatment for rheumatoid arthritis, psoriasis and other autoimmune disorders is likely to become the world’s top-selling drug next year, after the current No. 1, Pfizer Inc.’s Lipitor, begins to face generic copies, she said. Humira is likely to generate cash for its owner well past its patent expiration since it’s a complex biological drug that may be difficult to copy, she said.

Generating Cash

“That $11 billion is probably going down” after the drug’s patent ends, she said. “But it’s not going to zero, and it’s going to throw off a ton of cash.”

The market for autoimmune treatments may grow by as much as 9 percent annually to $32 billion by 2015, according to IMS Health Inc., the prescription-data company based in Norwalk, Connecticut.

Abbott also has “a handful of interesting biological assets that the market isn’t giving them credit for,” Rubin said. That makes it an attractive target for any drug company looking to expand its biologics business, she said.

Catherine Arnold, a drug industry analyst with Credit Suisse in New York, said the price tag may be held down by doubts about Humira’s potential successors within the Abbott pipeline. Candidates like bardoxolone, for chronic kidney disease, still aren’t proven, she said in a note to clients.

Would-be bidders may also have the same worries about Humira that turned it into a drag on Abbott’s shares, said Frederick Frank, vice chairman of New York-based investment bank Peter J. Solomon Co. Humira generates about 40 percent of the company’s earnings today. It will likely account for 80 percent of profits at the new venture, Frank said.

‘Hard to Replace’

“When it goes off patent, that is going to be a big downer, and hard to replace,” he said.

The two companies Abbott is creating are “very different” in terms of business model, target markets, distribution chains and other aspects, Chief Executive Officer Miles White told analysts on a conference call yesterday.

“Both will be valued more accurately or, frankly, appreciated more by investors” as separate entities, he said. “I think we’ll see that we attract investors who haven’t been in our company or haven’t invested in our stock as we allow them the choice of these two, distinct identities.”

The split “is good news,” said Jan David Wald, an analyst at Morgan Keegan & Co. in Boston, in a telephone interview. “You’ll start to see more people interested in the stock, which has languished for years. The two companies each will be more valuable than they are together.

Undervalued

“The medical device business is undervalued because it’s part of pharma,” said Wald, who has an “outperform” rating on Abbott. “The research pharmaceutical business can stand on its own and do rather well because of the pipeline.”

White will head the medical products company while Richard Gonzalez will lead the pharmaceuticals business. The split is expected to be completed by the end of next year, Abbott said.

The medical-products company will sell Abbott’s medical- devices, including the world’s No. 1 heart stent, Xience, diabetes products, diagnostic equipment and generic drugs. Stents generated $2 billion in sales last year.

--With assistance from Allison Connolly in Frankfurt, Michelle Fay Cortez in Minneapolis and Phil Serafino in Paris. Editors: Reg Gale, Phil Serafino

To contact the reporters on this story: Alex Nussbaum in New York at anussbaum1@bloomberg.net; Drew Armstrong in Washington at darmstrong17@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net


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