Abbott (ABT) is splitting itself in half in an attempt to unlock greater value from its rich drug pipeline. For years, investors have conservatively valued Abbott. Despite a steady stream of positive pipeline data, investors are paying only about 10 times next year earnings, which is at the low end of its 5-year historical PE range.
The move to split in half is a smart one and is likely to pay off for investors who hold both the legacy devices company and the soon-to-be created drug player. There is a rich history of investors paying up for robust pipelines, and with Abbott's drug business firing on all cylinders, the timing is right to spin the segment out.
As I wrote previously in "A Hot Streak for Abbott Labs Drug Pipeline", Abbott's drug development team has had a slate of recent victories. While some competitors have struggled to carve out an identity amid patent expiration, Abbott has built a solid drug pipeline to drive future growth.
One such drug is Daclizumab. Abbott just reported positive Phase 2b trial results for the drug in treating multiple sclerosis. Patients enrolled in the study saw up to a 54% reduction in annualized relapse. This is impressive given it’s a once a month treatment, which is a significant competitive advantage. This was the first of two registered studies evaluating the drug in relapsing patients. The drug, currently in Phase III, has blockbuster potential given 2.5 million people suffer with MS and current treatments are raking in some $14 billion a year.
Another drug, Bardoxolone, will be used in the treatment of chronic kidney disease ("CKD") in type 2 diabetes patients. The drug could hit the market as early as 2014 and is enrolling 1600 patients in a Phase III trial. If the drug is successful in delaying dialysis, the drug could generate over $2 billion in annual sales. So far, the results are promising. 90% of patients have improved and the diseases progression slowed in some instances duri! ng a Pha se 2b study.
Just last week, Abbott also updated data on its hepatitis C drug, ABT-450. Hep C has garnered a lot of investor interest following the FDA approval of Vertex's Incivek and Merck's Victrelis, both of which carry a price tag around ~50k. The interim data from its ongoing mid stage trial suggested the drug could cure the disease absent Interferon, a drug with many side-affects. Further, the trial suggests a faster treatment time at 12 weeks instead of 24 for competing treatments. Currently, the drug has a chance of approval around 2015.
In addition, the new drug company has Duodopa in Phase III for Parkinson's, Elotuzumab for multiple myeloma and Elagolix for endometriosis in the pipeline. And, the company is targeting label expansion for its widely successful Humira.
Pre-split, the slower growing device and nutritional business has had to fuel a lot of the drug pipelines R&D. In spinning the company off, the legacy company will see improving cash flow and dividend opportunity. The drug unit, with robust sales from Humira, will also have the ability to return money to shareholders and tap equity markets, which typically reward development companies with higher growth multiples.
Given the company has reported double digit earnings growth in 17 of the past 18 quarters, investors have had a lot to feel good about. With the upcoming split they may just find themselves even happier as the street more appropriately values the growth opportunity.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ABT, VRTX over the next 72 hours.
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