Inside the New Abbott: A Lot Like the Old Abbott But Without Humira

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We previously profiled AbbVie, the soon to be created spin-off of Abbott (NYSE: ABT). AbbVie will house the firm’s most famous drug, Humira, as well as the rest of the company’s proprietary pharmaceuticals. Essentially, the new Abbott isn’t much different from the old Abbott, minus the blockbuster drug Humira and other members of its drug lineup like AndroGel and TriCor.

The “new” Abbott will have four segments: Established (generic) Pharmaceuticals; Nutritionals; Diagnostics; and Vascular Products. Let’s take a look at the new Abbott’s business and see what’s in store for the new company.

Established Pharmaceuticals

Abbott’s Established Pharmaceuticals business generated $2.9 billion in sales as recently as 2009. However, the company purchased Piramal Healthcare Limited’s generic drugs business, which is one of the largest branded generics businesses in India. The acquisition greatly expanded Abbott’s product lines, and the segment generated $5.4 billion of revenue in 2011.

 

Image Source: Valuentum Securities, Abbott 2011 10-K

Clarithromycin is an antibiotic drug used for treatment of pneumonia, tonsillitis, and other relatively minor illnesses. Consumption should remain relatively stable, but the drug may have some room to expand into emerging markets.

TriCor and Lipanthyl are used to treat cholesterol, and we like the long-term potential for these generics as obesity and cholesterol problems in the US do not appear to be reversing anytime soon. Further, as incomes across the developing world continue to grow, we think the wealthier nations will become increasingly more likely to develop similar health issues.

Overall, we’re fans of the Established Pharmaceuticals business, and we believe it will be a solid contributor to earnings at the new firm.

Nutritionals

 

Image Source: Valuentum Securities, Abbott 2011 10-K

Nutritionals are one of the more attractive businesses in the healthcare space. Marked by strong margins and little reinvestment, other companies have shown a willingness to pay a premium for a good nutritional business. Earlier this year, Pfizer’s (NYSE: PFE) nutritional business sold for $11.9 billion—a valuation of 19.8x 2012 EBITDA (earnings before interest, taxes, depreciation and amortization). The move has provided Pfizer with flexibility as it deals with the post-Lipitor world.

The firm’s Pediatrics Nutritionals segment remains a stable business in the US, and it continues to grow internationally as developing nations work to improve nutritional standards. The company’s Adult Nutritionals segment also remains strong, in our view, and we believe products made by Myoplex and EAS are wildly profitable due to the opaque nature of the supplement business. Additionally, the segment includes strong brands such as PediaSure, Ensure, and PediaLite, all of which should remain cash cows.

Although we wouldn’t be shocked to see the "new" Abbott cash in on the generous valuations given to nutritional businesses (via a sale), the company could also just simply ride the demographic tailwinds and capitalize on strong earnings growth.

Diagnostics and Vascular Products

 

Image Source: Valuentum Securities, Abbott 2011 10-K

Diagnostics are one of the segments of the healthcare world that could be negatively impacted by the Affordable Healthcare Act. The new legislation will add an excise tax on medical devices, though the extent is currently unknown. Regardless of the extent of the tax, we could see lower margins in the device segment.

However, products tend to be relatively sticky due to the training and learning costs associated with new tests and devices; thus, sales should hold up fairly well unless tests with greater efficacy come to market.

 

Image Source: Valuentum Securities, Abbott 2011 10-K

The new tax could also negatively impact Abbott’s coronary stents business, which is already a fairly competitive market. Still, the firm has some solid products in the pipeline which could kick-start growth. And as we stated earlier, doctors and healthcare professionals tend to resist change, particularly if a product has robust efficacy.

The New Abbott Will Be a Cash Cow

Although the new company will lack the headliner drug Humira, we think cash flow generation will remain strong. The “new” Abbott would have generated over $2.7 billion in operating cash flow during 2011—a smaller figure than AbbVie, but robust nonetheless. Selling one of its segments could add to the firm’s cash hoard, but we do not view the move particularly likely at this time.

Unfortunately (in the near term), the business retains substantial exposure to foreign markets, particularly to Europe, which continues to push out the payment cycle. This could lead to accounts receivable expansion and lower cash flow generation until European economic conditions improve. Still, the company will be well-capitalized, allowing it to easily withstand the impact of a slower cash conversion cycle.

Investment Considerations

Unlike AbbVie, the "new" Abbott will not provide investors with a large dividend yield. At $0.14 per share per quarter, shares should yield just below 2% when the company begins trading. Therefore, we do not expect the company to be as appealing to income investors as large pharmaceutical companies.

Still, Abbott provides investors with significant exposure to developing markets, and it will house several highly-profitable segments. With nutritional companies alone garnering 20x EBITDA multiples, we think the market will price in a generous multiple for the new firm.

All things considered, we expect strong performance from both Abbott and AbbVie, though the latter may have better total return prospects given its hefty dividend yield and potential underpricing out of the gates. We will continue to monitor both firms closely for addition to our actively-managed portfolios.


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