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Abbott's spinout of AbbVie offers lessons
A big pharma company buying a biotech one is very much a run-of-the-mill experience; many biotech’s business plan is to aim for being acquired when it reaches a sufficiently material status. So it is news, of a sort, when a big pharma company unloads a biotech business, but that is exactly what has happened with the arrival of AbbVie, the spinout from Abbott Labs, which becomes official with the start of the new year. The event has caused hardly a stir in the financial community (so dramatically different from some mergers, which feature highly public battles, especially for less-than-friendly acquisitions); Abbott management announced the transaction roughly a year ago, and had been carefully managing developments up to the split-up date. Preliminary trading put the market capitalization of AbbVie at around $55 billion, and Abbott at $48 billion; both of these are giant companies. Abbott has had positive experience in this sort of realignment; it divested its hospital products business, now known as Hospira, in 2004, and that has gone on to become a successful life sciences manufacturer.
At the time of the initial announcement, Abbott management was saying that the two businesses have diverged: AbbVie will have the company’s specialty pharmaceutical business, primarily the Humira franchise, which is worth nearly $9 billion and represents more than half of AbbVie’s current sales. Abbott will continue as four business units: branded generic pharmaceuticals; medical devices; diagnostics; and nutrition products.
We’ll give the “diverging businesses” argument the benefit of the doubt: The exact opposite has been the logic of many a biotech acquisition. But the divestiture highlights two trends—both of which are valuable to note.
AbbVie looks, initially, to be a well-structured research biopharmaceutical company. It has the Humira franchise (and a few others) for cash flow, and it has a healthy slate of Phase I—III products in development. Specialty pharmaceuticals (biotech or not) are the growth component of Big Pharma today; the hallmarks of the sector (currently grossing around $77 billion in the US) are expensive products with complicated delivery processes that require close coordination with distributors and healthcare providers.
By comparison, Abbott might seem to be a mundane healthcare products business—but it has significant growth opportunities in medical devices (it is a leading drug-stent manufacturer) and in diagnostics. In large part through its nutrition business, Abbott is a strongly globalized company; 70% of its sales are ex-US, and the company expects to have 50% of its future business in emerging markets alone by 2015. In November at investor road shows and elsewhere, Abbott has been forthright in its plans to wring higher margins from its business through operational efficiencies. With Abbott’s global supply chain and diverse customer and payer communities (including the everyday consumer), those are the kinds of efficiencies that Pharmaceutical Commerce emphasizes in its industry coverage. The entire biopharma industry, including generics, is looking for those same operational efficiencies and global reach.
We wish the employees of the two new companies best of luck as they embark on this journey. Their success could set the pattern for the rest of the industry.