Monday, December 12, 2011

2011 M&A of the Year Nominee: Abbott/Abbott Pharma

It's time for the IN VIVO Blog's Fourth Annual Deal of the Year! competition. This year we're once again presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (a half dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

When the IN VIVO Blog polled its readers on their preferred name for the newco drug company to be spun out of the break-up of Abbott, the hands-down favorite was Costello, the hapless, blimp-like other half of the comedy duo. Once again, Sagacious Reader, you have cut to the heart of matter: Who’s on first?
We’ll get to that in a moment. First, we want to note that the decision to bust up comes at an historic moment for the industry, and captures several of the issues that make CEOs and directors wake up at night in a cold sweat:

Diversification vs Focus. Focus is in. Diversification, not so much. Leading analysts have lately been beating the drum for diversified companies to unlock value by breaking up into pure-play splitcos. The valuation argument has its dissenters – Barbara Ryan (Deutsch Bank) isn’t persuaded that split-ups have made anyone much money, though she concedes it might make sense in Abbott’s case. As to which model best serves innovation, we note that the drug divisions of J&J and Roche, both diversified companies, outshine their peers; while BMS, the poster company for slimming down, has been delivering a superb pipeline.

 Portfolio Rationalization. Is anyone minding the store? CEO Miles White has acknowledged that the pharma company was masking the value of the device company, and that its Humira-driven growth had thrown the diversified giant’s balance out of whack. Apart from questions about the value and depth of Abbott’s later-stage pipeline, analysts have fastened on the extraordinary concentration risk posed by Humira which accounts for nearly half of the pharma unit’s $18 billion in annual sales. Jami Rubin of Goldman Sachs recommends diversifying away from that risk and several analysts believe the best route to that end is through a smart acquisition.

The Influence of the Street. Rubin, who’s been the most vocal of the breakup-to-unlock-value school, appears to be getting heard in the C-Suites and boardrooms of some pharmas. Which raises the question of whether the agenda of sell-side analysts should influence the strategy of large, research-based pharmaceutical companies.

The Allure of the East. Speaking of strategy, what more powerful force is there than emerging markets for redistributing capital, infrastructure, and operations across the globe? White was clear: the device company, which will include diagnostics and the established products business, faces eastward toward China, India, Russia, and Turkey, while the drug company “is very much a developed market game.” The established products business, which includes branded generics, will be the beneficiary of the emerging market synergies of the Piramal and Solvay acquisitions.

The Abbott break-up deserves the nomination because it marks the first time that a diversified healthcare company has spun off its pharmaceutical division. In the past such split offs have been the province of global chemical companies like Eastman Kodak, Du Pont, BASF (whose drug unit, Knoll, Abbott purchased to get Humira), and Akzo Nobel. It may also mark the ascendance of investor interest in devices – the biggest life science M&A of 2011 by a good margin was J&J’s acquisition of Synthes – over drugs.

At a recent industry conference in London sponsored by the Financial Times, Miles White had to fend off speculation that Abbott’s drug business might be on the block. We don’t hear anyone speculating that the device business will be for sale. Who’s on first? Ask Miles White.

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