Quarterly earnings calls often can be sleepy, rote events but Abbott broke that mold during its third-quarter financial update Oct. 19 by announcing a plan to split into two publicly traded companies over the next 12 months.

After implementing a workforce reduction of 1,900 U.S. employees in January, Abbott in recent months had re-organized its diversified company into three units - proprietary pharmaceuticals, durable growth products and innovation-driven devices (Also see "Abbott Shaves U.S. Pharma Costs With Restructuring" - Pink Sheet, 26 January, 2011.). This latest announcement reflects that change, as Abbott will divide into a diversified medical products company, to retain the Abbott name, and a research-based pharmaceuticals company, which will take a new, to-be-determined name.

The research-based pharmaceuticals company will include Abbott's current portfolio of branded marketed drugs and biologics, including top-seller Humira (adalimumab). A tumor necrosis factor (TNF) blocker approved for rheumatoid arthritis, psoriasis, Crohn's disease, psoriatic arthritis and juvenile idiopathic arthritis, Humira posted third-quarter sales of $2.111 billion, including $894 million in the U.S. for an 18.1% growth rate. Through the first three quarters of 2011, Humira sales have totaled $5.754 billion, with company executives predicting the biologic would bring in roughly $8 billion for the full year.

Expectations For Slowing Humira Sales Dog Stock Price

With competition in some of its indications expected from both biosimilars and products in development, such as Pfizer's oral pan-JAK inhibitor tofacitinib, Humira's success has been a double-edged sword for Abbott. It brings in huge revenue, but leaves investors skeptical about the value of Abbott's stock because Humira is approaching 50% of the pharma's overall drug revenues in an environment where its sales growth is expected to decelerate.

"While we continue to believe that the market is overly pessimistic on the mid-term prospects for Humira (which beat Q3'11 sales estimates again today), the move to split the company removes much of the valuation overhang created by this product," wrote Jefferies Equity Research analyst Jeffrey Holford in an Oct. 19 note.

The importance of Humira to Abbott's proprietary pharmaceuticals unit was illustrated in the third-quarter sales data by the revelation that of the company's 20-odd prescription pharmaceutical products, only two besides Humira - cholesterol drugs TRILIPIX (fenofibrate) and Niaspan (niacin extended-release) - were on pace for blockbuster sales this year.

During the earnings call, Chairman and CEO Miles White, who will run the diversified medical products (DMP) company after the split, noted that proprietary pharmaceuticals bring in about $18 billion annually and have produced double-digit, top-line sales growth in four of the past five years.

"That performance was built on a sustainable mix of well-known prescription brands, including Humira," White said.

Current Executive VP, Global Pharmaceuticals, Richard Gonzalez, who will head the new research-based pharmaceuticals (RBP) company after the split, asserted that Humira will continue to generate growing sales by increasing penetration in indications like psoriasis, where it has a penetration rate of 6%. In its most mature market, RA, the biologic has a penetration rate of 20%.

"If you look at the performance of Humira, we believe that performance is very sustainable going forward," he said. "If you look back to 2007, Humira has grown on average $1.1 billion every year, and we believe that is sustainable and actually slightly accelerating as we move from 2011 to 2012." He added that Abbott is working to add six more indications to Humira's label, which would have a "material impact" on future sales.

Some Overlap In Geographies And Portfolios

While the new, unnamed company will focus on both Abbott's current portfolio of pharmaceutical products and its R&D pipeline - which Gonzalez will outline in more detail during an investor presentation Oct. 21 - the DMP business will not be simply a device play. DMP will comprise four segments that currently generate about $22 billion in annual revenue: medical devices (27% of unit sales), diagnostics (20%), nutritionals (28%) and branded generics (25%).

"[Abbott is] aligning risk and business profiles for investors," wrote Morgan Stanley analyst David Lewis in an Oct. 19 note. "This explains why branded generics remain in medical products, making this not exclusively a pharma split."

A key differential between the RBP and DMP companies will be geographic focus. With RBP's pipeline aimed at producing new pharmaceuticals for specialty indications like chronic kidney disease, hepatitis C and neuroscience, Abbott projects 57% of the unit's sales should occur in the U.S. and 31% in the EU and other developed nations. Emerging markets will comprise only 12% of RBP product sales.

By contrast, DMP will depend heavily on emerging markets, with a projection of 39% of sales coming from such countries, compared to 27% from the U.S. and 34% from ex-U.S. developed markets.

In an Oct. 19 note, J.P. Morgan analyst Michael Weinstein predicted that the DMP business will be the greater growth vehicle overall. He projects that Humira will account for more than 75% of RBP's sales in 2013, and that the new company will produce 0.6% compound annual growth through 2015. He called Abbott management's guidance of high-single-digit CAGR for the DMP segment as "too aggressive" but thinks the unit will grow between 4% and 5% annually.

"[It will be] valued on par with the leading large cap medical product peers," Weinstein wrote.

RBP Pipeline Said To Include Several Potential Blockbusters

Gonzalez is bullish on the RBP pipeline, citing bardoxolone, an oral Nrf2 activator in Phase III for chronic kidney disease, daclizumab, an anti-interleukin-2 monoclonal antibody partnered with Biogen Idec in Phase III for multiple sclerosis, and a trio of Phase II drugs - a protease inhibitor, a polymerase inhibitor and an NS5A inhibitor - that may comprise an all-oral, multi-drug cocktail for HCV.

Abbott expects bardoxolone Phase III data in 2013 and a launch in the following year, a filing of daclizumab in 2014, and potential market entry for the HCV combo in 2014. Each could generate "multi-billion dollar peak year sales if successful," Gonzalez claimed.

Abbott now has more than 30 new molecular entities in clinical trials, he said, including 20 new compounds or indications in Phase II or Phase III. The pharma has tripled its portfolio of NMEs in recent years by adding 11 new assets through a focus on strategic licensing, acquisitions and partnering, he added.

"Our focus is on medicines that hold promise in difficult-to-treat diseases with significant market opportunities," Gonzalez said. "Our goal is to develop products that have strong clinical performance and deliver meaningful economic value in today's health care environment."

JPM's Weinstein doesn't fully share Gonzalez's optimism, opining that "while the pipeline has a number of interesting assets, most of Abbott's pipeline is early-stage with few near-term catalysts on the horizon."

Abbott is not the first pharma company to diversify its holdings, then change course by trying to narrow its focus - Pfizer Inc. and Bristol-Myers Squibb Co. have followed a similar path recently. In general, the entire pharma industry is searching for a new business model that can attract capital on a level with "hotter" sectors like information technology and high-tech.

Jefferies analyst Holford thinks the split will leave the RBP unit as a likely merger-and-acquisition target for another big pharma, such as Merck and Co., Roche, AstraZeneca or Bayer AG. He predicts the next round of industry consolidation will occur in the 2012-2013 timeframe.

- Joseph Haas (j.haas@elsevier.com )

Abbott To Split Into Two Publicly Traded Companies Over Next 12 Months

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