New Developments At Abbott Labs

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Abbott Labs (NYSE: ABT) has been in the news a lot lately. With an upcoming spinoff and new drug trial information coming out, the stock has analysts talking. Most recently, the company was featured on Thursday’s Mad Money, where Jim Cramer believed the company would create $10 per share in value to investors through the spinoff. As a result, the stock traded up over 2.5% on Friday before beginning to retrace its steps.

Let’s take a look at the company’s most recent developments.

The Spinoff

Word of Abbott Lab’s split isn’t really news, as the company announced its plans over a year ago. However, with the spinoff scheduled to complete in less than two months, it’s time to take a look at how it will affect the company and the stock price.

The company plans to spinoff its research-based pharmaceutical segment into a company called AbbVie. Meanwhile, the new Abbott Labs will retain the company’s businesses in diversified medical products and nutritionals. The two new company’s present investors with entirely different growth prospects.

Abbott Labs will grow faster without its mature pharma segment. Of course, this comes with a lower dividend yield. On the other hand, AbbVie will pay a nice juicy dividend to income investors, but growth will come more slowly. The exact amounts of the dividend for each company are unknown, but they should add up to Abbott’s current $2.04 annual dividend.

Investors may be inclined to jump in now, before the split, and sell the shares of the company they don’t want in January. The spinoff should produce value for investors by attracting new investors in the long term looking for more growth or more income. However, the increase in sellers immediately after the spinoff may provide a good buying opportunity for either stock.

New Hepatitis C Treatment

Abbott has made significant progress in its anti-viral Hepatitis C drug regimen in the past year. Most recently, the company reported a 99% cure rate in clinical trials, including a 93% cure rate in null responders who had failed in previous treatment. In comparison, Vertex Pharmaceuticals’ (NASDAQ: VRTX) Incivek sports just a 32% cure rate in null responders.

Considering Hepatitis C affects more than 170 million people worldwide, this could prove to be Abbott’s next blockbuster. Gilead Sciences (NASDAQ: GILD) is right behind Abbott with its own Hep-C regimen, but data from its phase 2 trial is not yet available. However, Gilead’s regimen would consist of just two or three pills compared to Abbott’s four-pill regimen. Efficacy is the most important factor in drug prescriptions, but all things equal, doctors will prescribe the most convenient regimen to patients.

3 Big Concerns

Abbott Labs’ partner Raeta Pharmaceuticals recently announced its discontinuation of phase 3 trials for a new kidney disease and diabetes drug. The new drug had the potential to become Abbott’s next blockbuster and broaden the company’s portfolio, which currently relies heavily on the rheumatoid arthritis drug Humira.

Recently, Humira’s dominance has come under attack. Pfizer (NYSE: PFE) finally got approval from the FDA for its rheumatoid arthritis drug Xeljanz. The drug will provide significant competition in a market where Abbott practically held a monopoly. It’s estimated that somewhere between 30% to 40% of RA patients do not respond to current treatments. Pfizer hopes to improve those numbers, and in doing so capture some of Abbott’s market share based on its drug’s efficacy.

Moreover, the patent for Humira expires in late 2016 in the U.S. and mid-2017 in Europe. With the trials for its kidney disease treatment discontinued and its Hep-C treatment just coming out of phase 2, it will still be awhile before Abbott has a strong blockbuster it can rely on like it does Humira. This will potentially limit the growth of the new AbbVie in the long-term.

For now, I’m going to take a wait and see approach to Abbott. I believe the spinoff will create an influx of sellers dropping the part of the company that doesn’t appeal to them, perhaps presenting a good buying opportunity. I’m more excited about the potential of AbbVie than I am the new Abbot labs, despite the patent cliff and new competition the company faces. I would like to see how Gilead Sciences’ treatment performs in phase 2 trials before making any investment, but if it drastically underperforms Abbott’s phenomenal results, it may create another blockbuster for Abbott.

adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Gilead Sciences. Motley Fool newsletter services recommend Gilead Sciences and Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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