Abbott Laboratories, long known for selling a mix of drugs, medical implants and baby formula, said Wednesday it will spin off its branded drug business and become two separate companies with more distinct identities.
The split-up frees Abbott from the risks and obligations of developing innovative pharmaceutical drugs, leaving the company with a more predictable business built around nutritional formula, generic drugs and heart stents.
In recent years Abbott has relied on a single blockbuster drug, the anti-inflammatory drug Humira, to help drive double-digit sales growth. 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 weighed on the company's stock and overshadowed performance across other businesses. Humira loses patent protection in 2016 and no obvious successor has appeared in the company's pipeline. Shares of Abbott have been virtually flat over the last two years at around $52. In that timespan the S&P 500 index has climbed about 10 percent.
CEO Miles White suggested Wednesday the split would benefit both new companies and give investors clearer options.
"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 81 cents Wednesday to close at $53.25.
Some analysts said other large pharmaceutical companies will likely follow Abbott's lead and pare down to focus on their primary business of developing new drugs. 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.
"There is no question that both our research-based pharmaceutical and diversified medical product businesses have evolved over time in very different ways into two different, compelling investment identities," White said on a call with analysts.
Shares of the new company will be distributed to Abbott shareholders in a tax-free transaction, Abbott said.
Abbott is the latest in a series of companies to announce such split-ups in the past year, including Kraft Foods Inc., the former Fortune Brands Inc. and Sara Lee Corp.
Also Wednesday, Abbott reported net income of $303 million, or 19 cents per share, down from $891 million, or 57 cents per share, in the same quarter last year.
Excluding a big charge to set aside a $1.5 billion pretax legal reserve related to the Depakote investigation, earnings were $1.18 per share, which beat analyst expectations by a penny.
Revenue rose 13.2 percent to $9.82 billion. Analysts expected $9.63 billion.