By Palash R. Ghosh: Subscribe to Palash's RSS feed
October 21, 2011 8:58 AM EDT
Shares of diversified health-care giant Abbott Laboratories (NYSE: ABT) have jumped since Wednesday when the company announced that it plans to separate into two different firms.
Specifically, the conglomerate will divide itself into a medical products firm (which will retain the “Abbott” name) and an as-yet-unnamed pharmaceutical research & development entity.
Current chairman and chief executive Miles White will be boss of the $22 billion-revenue medical devices business, which he said “will be one of the largest and fastest-growing global diversified medical products companies, with a compelling portfolio of durable growth businesses in medical technology, branded generic pharmaceuticals and nutritionals” as well as diagnostic businesses.
The pharma operation, which will be spun-off to existing Abbott shareholders, will be headed by long-time company executive Richard Gonzalez, the current executive vice president of global pharmaceuticals. This entity, which generates annual revenues of about $18 billion, will focus on branded (generic) pharmaceuticals and seek to develop new products in disciplines like “immunology, Multiple Sclerosis, chronic kidney disease, Hepatitis C, women’s health and oncology.”
Mark Coffelt, president of Empiric Advisors and portfolio manager of the Empiric Core Equity Fund (Nasdaq: EMCAX) told International Business Times the split makes sense and represents a classic case of a company seeking to maximize shareholder value of the underlying assets by separating a high-growth businesses from the lower-growth segments.
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“Abbott is a fabulous company which is very shareholder-oriented,” he said. “They are aware that despite solid revenue and earnings growth, the stock has been flat or negative -- that is, going nowhere -- for at least the past five years. So now they’re obviously seeking to unlock some of that latent value.”
Coffelt noted that Abbott shares are currently trading at forward P/E of under 11 -- he estimates the medical device company alone should be value as high as 18 or 20 P/E.
“Look at a company like Mead Johnson Nutrition (NYSE: MJN), that’s trading at a forward P/E of almost 23,” he said. “Abbott may have noticed that, and decided their own nutritionals business should be valued much higher than it is.”
Indeed, the company’s recently-released third-quarter results may shed some light on Abbott’s decision to split.
While global revenues climbed by 13.2 percent, sales generated in the emerging markets surged 21 percent. (The “new” Abbott company, which White will take over, already gets 40 percent of its business from the fast-growing emerging markets; while the to-be-spun-off pharma unit is primarily focused on the slower-growth developed markets.
A split is typically based on the belief that a company’s individual parts are worth more than the sum of the whole.
Rick Wise, an analyst at Leerink Swann, estimated that Abbott (in its entirety) should be valued at between $60 and $65 per share -- of which the research drug segment should be worth between $35 and $40 per share.
(Abbott shares closed Thursday at $54.05).
Damien Conover, an analyst at Morningstar, told media that the split will also help to distinguish between Abbott’s different business lines.
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