Abbott (ABT) reported strong third-quarter results Wednesday and outlined plans to split itself into two distinct entities: one in diversified medical products and the other in research-based pharmaceuticals. We liked the quarter and are fans of management’s plans to break apart the company. Our $68 fair value estimate remains unchanged.
Abbott’s worldwide sales advanced 13.2% from the prior-year period thanks to solid performance from proprietary pharmaceuticals and its durable growth business (nutritionals, established pharma, lab diagnostics, and diabetes care), and the firm was able to leverage such growth into 12.4% earnings-per-share expansion, excluding a $1.5 billion litigation reserve related to a previously-disclosed DOJ investigation (Depakote). Emerging market sales continue to be a key driver, jumping 21% from the prior-year period and now represent over 26% of the firm’s business. Abbott confirmed its guidance for double-digit earnings-per-share growth, narrowing the range for full-year 2011 to $4.64 to $4.66, representing 11.5% expansion.
The firm also announced plans to split its existing business into two distinct publicly-traded entities. According to its press release: “The diversified medical products company will consist of Abbott’s existing diversified medical products portfolio, including its branded generic pharmaceutical, devices, diagnostic and nutritional businesses, and will retain the Abbott name…The research-based pharmaceutical company will include Abbott’s current portfolio of proprietary pharmaceuticals and biologics and will be named later…The research-based pharmaceutical company has nearly $18 billion in annual revenue today and will have a sustainable portfolio of market-leading brands, including Humira, Lupron, Synagis, Kaletra, Creon and Synthroid…The diversified medical products company has approximately $22 billion in annual revenue today and a durable mix of products balanced across four major businesses.”
In all, we think such a split will allow two separate management teams to improve operations, implement cost savings, and allocate capital better than they could do as one entity. Further, we like the research-based pharma company’s attractive pipeline, and the diversified medical products company’s emerging market potential. CEO Miles White will head the diversified medical products company, while Richard A. Gonzalez, executive vice president (Global Pharma) will become chairman and CEO of the research-based pharma company. The transaction is intended to be a tax-free stock distribution to Abbott shareholders, and management expects that both companies’ dividends, when combined, will equal the current Abbott dividend at the time of separation, which is expected to be completed by the end of the year.