The Anatomy Of Abbott's Twins

12/24/2012


Abbott Laboratories ($66; ABT), rated Long-Term Buy, will spin off most of its pharmaceuticals business — now called AbbVie — Jan. 1. Investors will receive one share of AbbVie for every share of Abbott.

When-issued trading began on Dec. 10, allowing investors to get a sense of the valuation of both companies, shown at right. We will provide advice on both the new Abbott and AbbVie early next year.

AbbVie

AbbVie will operate the branded-drug unit. It expects to pay a dividend of $0.40 per share each quarter, equating to a yield of roughly 4.6% based on when-issued pricing.

In the first nine months of 2012, the unit's sales rose 6%. Blockbuster Humira, a biologic drug approved to treat nine different illnesses, accounted for nearly 50% of AbbVie's sales in the nine-month period. Excluding Humira, sales fell 2%.

Humira's sales have risen 14% so far this year, and it seems capable of solid — albeit slower — growth until its patent expires in 2016. So far, no generic biological drugs have been approved in America. But with many companies working on biosimilars, we cannot assume Humira will maintain its market share or pricing power after the patent expires.

Worries regarding dependence on Humira has weighed on shares of Abbott in recent years, and five of its seven highest-selling drugs saw revenue decline this year. AbbVie may have trouble compensating for generic competition to its cholesterol drugs. The stock trades at less than 11 times trailing earnings, a 31% discount to drug pure plays in the S&P 1500 Index.

A new batch of drugs should start hitting the market in 2015. AbbVie targets 15 major regulatory approvals in the next five years, including four more indications for Humira. About 30% of the pipeline consists of
biologics.

Abbott

The new Abbott is a diversified health company selling into a variety of growth markets. Emerging countries generate about 40% of sales. Revenue grew 4% and operating earnings 12% in the first nine months of 2012. With a quarterly dividend of $0.14 per share, the new, smaller Abbott yields 1.8%.

Abbott will operate four segments.

• Nutritionals (30% of the unit's sales, 15% operating profit margin) is the No. 1 player in the global adult-nutrition market and the U.S. pediatric-nutrition market. Profits in the nine months ended September jumped 33%.  

• Medical devices (26% of sales, 23% margin) focuses mostly on vascular health, diabetes, and vision. Sales climbed 12% and profits 10% in the nine months ended September.  

• Established drugs (24%, 24%) boasts a portfolio of more than 500 branded generics. Emerging markets account for about 60% of sales.

• Diagnostics (20%, 20%) provides equipment for clinical tests and blood screening.

Abbott's diversified business mix seems capable of supporting double-digit profit growth in coming years. Its valuation based on when-issued trading — an estimated 18 times trailing earnings — reflects that growth potential but is still 9% below the average for health-care equipment stocks.

Conclusion

More information on the pending split and an annual report for Abbott Laboratories can be obtained at 100 Abbott Park Road, Abbott Park, IL 60064; (847) 937-6100; www.abbott.com.

ABBVIE AND ABBOTT BY THE NUMBERS
Industry
AvvVie ($34; ABBV)
Pharmaceuticals
Abbott ($32; ABT)
Health-Care Equipment
Operations
2011 sales ($)
17.4 billion
21.5 billion
Est. 2013 sales ($)
>18 billion
23 billion
Est. 2013 operating cash flow ($)
6 billion
4 billion
Percentage of sales in the U.S. (%)
42
30
Balance Sheet
Cash ($)
7.2 billion
5.0 billion 
Debt ($)
15.7 billion
7.5 billion
Expected credit rating
Investment Grade
Investment Grade
Capital Deployment
Annual dividend per share ($)
1.6
0.56
Yield (%)
4.6
1.8
Est. 2013 R&D/sales (%)
14
6 to 7
Valuation
Trailing price/sales (estimated)
3.1
2.4
Industry average price/sales
2.9
2.8
Trailing price/earnings (estimated)
10.9
17.7
Industry average price/earnings
15.8
19.5
Note: Prices and valuations are based on "when issued" trading, which began on Dec. 10. Regular trading will start on Jan. 2.     Sources: Abbott, AbbVie, and Goldman Sachs.

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