21 October 2011

Let’s call the whole thing off

This week Abbott Laboratories was the latest in a line of multinationals announcing break-up plans in an attempt to win favour with Wall Street investors. It will list the unit coming out of the separation, as yet unnamed, and joins the likes of Marriott International, Expedia and Sara Lee in a rush to generate better stock market results from undervalued parts of its business.

Zephyr has recorded 74 planned and rumoured demergers so far this year, compared with 76 for the full-year 2010 and 67 in 2009, so the trend is increasing, and this is against a background of declining overall deal numbers.

Illinois-based Abbott will split itself into a research-focused business and a medical products company worth USD 22 billion a year in sales, which makes branded generic drugs, diagnostics equipment and eye care products. The research-focused drug maker, worth around USD 18 billion in annual revenue, will house all the group’s proprietary medicines, including its flagship anti-inflammatory drug Humira, worth more than USD 6 billion a year in sales.  

Wall Street responded well to the news. Before Abbott revealed its plan on 19th October, its shares finished at USD 52.44. They gained just over 6 per cent on the announcement, against a weaker Dow Jones Index, to reach a new 52-week high of USD 55.61. When Sara Lee said at the end of January it would spilt off its bakery and drinks business after failing to sell the entire company, its shares fell. And it was the same story when Encore Oil announced a similar plan for its oil and gas exploration activities in March.

Encore has since had to put off floating this new company, to be known as XEO Exploration, because of weak investor sentiment. It had hoped to generate fresh funds for exploration – much like Abbott will be looking for additional cash for its R&D pipeline.

It need hardly be stated the markets are hostile; 68 planned IPOs from 2010 and 2011 have been postponed or withdrawn, and investor appetite for tech stocks has been slowing since LinkedIn went public in May. However, tracking share prices following similar demergers to the one planned by Abbott should provide a rough indication of what’s in store for the new drug company.

US-based Hospira, the world leader in specialty generic injectable pharmaceuticals, was Abbott’s hospital products division until it completed its stock market debut in May 2004. Its shares finished just 6 per cent higher yesterday than they did after their first day of trading, and are worth 47 per cent less than Abbott’s.

While listing the proprietary drug unit will undoubtedly raise cash and generate interest in the short-term – and the new company is already being touted by analysts and the press as a potential takeover target – the business will have to keep a strong pipeline if it wants the markets to recognise its worth. It has six years until Humira’s patent runs out, and its IPO funds will have run out long before 2017.

© Zephyr