The split-up, announced Wednesday marks an abrupt shift for the 123-year old company, which sells a broad range of products from stents to arthritis drugs to contact lens solution. While many pharmaceutical companies weathered losses as the patents on their blockbuster drugs expired, Abbott has continued to post double-digit sales growth, chiefly because of its anti-inflammatory drug Humira. The injectable drug posted sales of $6.5 billion last year, nearly a fifth of the company's total sales.
But Abbott's reliance on the drug has been a concern for investors, overshadowing the company's performance across other businesses. Humira loses patent protection in 2016 and the company has largely been unsuccessful in developing new therapies to replace the drug.
CEO Miles White suggested Wednesday the split is about crafting two companies with clearer messages for investors.
"What happened here is the pharma piece got so big, and is so different, that these two investments make sense separately, and both are of a critical mass and size that they have great sustainability going forward as independent companies," White told analyst on a teleconference call.
Analysts said the split makes sense given that the company has evolved into two separate businesses, each with different strategies and outlooks.
"It makes sense for stockholders because it's a company with two very different risk profiles and investment propositions: high-risk drug discovery and lower-risk generics and nutritional products," said Erik Gordon, a professor and analyst at the University of Michigan's business school.
News of the company's breakup overshadowed Abbott's disclosure that it set aside a mammoth $1.5 billion to cover a potential settlement for illegal drug marketing.
Company shares rose 68 cents to $53.12 in afternoon trading.
Some analysts said other large pharmaceutical companies should follow Abbott's lead and pare down to focus on their primary business. Investors have been calling for the breakup of health care conglomerate Johnson & Johnson for years, and Pfizer announced over the summer it is considering the sale of its animal health and nutritional businesses.
"The large pharmaceutical model does not discover products, it only enhances them and markets them. And the larger the pharmaceutical company is, the more difficult it becomes to develop new products," said Steve Brozak, president of WBB Securities, an investment brokerage focused on drug and biotech companies.
Abbott, based in North Chicago, Ill., also reported a 66 percent decline in third-quarter net income as it set aside $1.5 billion for legal reserve related to an investigation into its marketing of the drug Depakote. The company said it is in discussions with the Department of Justice to settle an investigation into whether Abbott promoted the anti-seizure drug to control aggression and agitation in seniors, an unapproved use.
In the last two years federal prosecutors have reached billion-dollar-plus settlements with several drugmakers, including Pfizer and Eli Lilly & Co., for marketing their drugs for unapproved uses.
The new spinoff will sell Abbott's branded pharmaceuticals, including the blockbuster arthritis and immune-disorder drug Humira and the cholesterol drug Niaspan. The business, which has not yet been named, will be led by Abbott's Richard Gonzalez who currently heads the company's pharmaceutical business.
The new drug company would have annual revenue of about $18 billion, Abbott said, based on 2011 estimates.
White will continue to lead the rest of the medical products company, which sells generics drugs, medical implants, diagnostic tests and baby formula. This company will retain the Abbott name and would have annual revenue of about $22 billion. For the first time, nutritionals including Similac baby formula will be Abbott's largest business, accounting for 28 percent of remaining revenue.
The company said the split would allow investors to value the companies on their distinct characteristics.
Morgan Keegan's Jan David Wald expected Abbott to spin off its nutritionals unit, following Bristol-Myers Squibb's (BMY) successful IPO of Mead Johnson Nutrition (MJN) in 2009.
"I'd lumped all the pharmaceuticals in one bucket," he said. "And they said, 'There's really two buckets here: The established (generic) pharmaceuticals are more like devices than a research-driven pharmaceutical pipeline.' That's something that was probably missed by everybody but the people inside Abbott."
The proprietary-drug business focuses on developed markets, which provide 90% of its sales. But Abbott has been driving other units more and more into emerging markets. Abbott is now No. 1 in branded generics in India, but doesn't even sell them in the U.S.
White said nearly 40% of the rump Abbott's sales will come from emerging markets, and that the firm will keep pushing into countries like India, China and Brazil. White forecast that the company, of which he will remain CEO, will grow sales in the high single digits while profit will grow in double digits. The drugmaker was guided flat until 2015, when its pipeline of new drugs kicks in.
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