Business and management
Pharmaceutical firms
Let's split
Oct 19th 2011, 20:16 by C.H.
THEY have been teetering on the edge for years. Now pharmaceutical firms are beginning to careen off the patent cliff. Drugs which once earned firms billions are facing new competition from their generic counterparts. In such a climate, one might think that diversification would help. Apparently not. On October 19th Abbott Laboratories, a diversified American health-care company, announced that its drug business would go it alone. Abbott plans to split into two publicly-traded firms by the end of next year.
Health companies used to assume that a bigger business was a better one. Virtually every quarter brought news of a fresh acquisition. But investors got squeamish. In January, Jami Rubin of Goldman Sachs warned that conglomerates are likely to trade below the sum of their parts. Concerns over the patent cliff, she warned, were distracting investors from the value of other assets. Companies seem to be taking the hint. Bristol-Myers Squibb shed its nutritional business in 2009. This year Pfizer announced plans to sell its infant-nutrition and animal-health businesses.
But Abbott’s announcement may be the most dramatic to date. Unlike Pfizer, whose pharma business accounts for 88% of its sales, Abbott is truly diversified. Splitting the company in two means shielding some of its businesses from the competition facing pharmaceuticals. One of the new firms will sell Abbott’s medical devices, diagnostics, generic drugs and nutritionals. This business, with about $22 billion in sales, will keep Abbott’s name and chief executive, Miles White. Thanks to acquisitions such as Piramal, an Indian drugmaker, nearly 40% of sales will be in developing markets. The company’s prospects seem sunny.
The future for the other firm is cloudier. It will be led by Richard Gonzalez, the current pharma chief, and will have nearly $18 billion in sales. It will focus exclusively on innovative medicines. Some think that Humira, a rheumatoid arthritis drug which is Abbott’s biggest seller, might come under attack. Such concerns have weighed heavily on the company’s stock over the past year.
Mr Gonzalez argues that Humira will sustain the firm for a while yet. Sales continue to grow and it may be approved for additional uses. And because it is a complex biotech drug, competitors may have a harder time producing an equivalent. It will be several years until Mr Gonzalez is proven right or wrong. In the meantime, he needs to find his new company a name.
In this blog, our Schumpeter columnist and his colleagues provide commentary and analysis on the topics of business, finance and management. The blog takes its name from Joseph Schumpeter, an Austrian-American economist who likened capitalism to a "perennial gale of creative destruction"
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I'm an Abbott retiree, and knew Miles pretty well at one point.
He made his name in the company on acquistions, first in the diagnostics business when he headed it, then in other businesses over the last 10 years.
He also unloaded the solutions business a while back in similar circumstances to this spin off...it's just that the dollar volume was smaller as a comparison to total sales at the time.
The job of the CEO has been, and continues to be, maximizing shareholder value. This is another move to do that.
Regarding all the negative comments about Pharmaceutical companies...when I was a teenager, the treatment for hypertension was to be put in a quiet room with the lights low and wait for the person to stroke out, or have some other event where the vascular system failed. Now we have fairly inexpensive drugs that let people continue to be productive for extended periods of time. The same is true of numerous other disease states.
The challenge is that somehow, good health care has somehow morphed into an "inalienable right". It would be similar to having a second car or a big screen TV becoming an "inalienable right"...oops, maybe they have! OK, so being sarcastic doesn't work as well on line. Do people make sacrifices for their second cars? What are they willing to sacrifice for health care above and beyond? Why should there be a difference?
As always, if you are really unhappy with something, stop pointing your finger at corporations and trace the money back to the source of all screwed up practices in the world...the inept, but well meaning interference practiced by governments who have lost sight of the fact that their role is to assure our safety, not run businesses and our lives for us through legislative fiat.
Classic investment banking scheme... 10 years ago conglomerate conglomerate to drive up M&A fees and now specialize, focus... again to boost up the lagging quarterly earnings. Wonderful.
It splitting the company really the greatest idea? Although the company selling Abbots medical devises seems to be a guarantee, the other business seems to risky. I'm no expert, but it seems like the abbots businesses are just going to be going down hill from here.
They're going to be quite sorry that they paid out all of those bonuses and monetary incentives, instead of shoring up their contingency reserves.
Katy Zei
Well, from my point of view, splitting the company into two is good idea. It is always be better that two companies to deal with different things, it can increase the specification. And people do not need to wait for long time to get their turn. But I do not if the fees and all kinds of charges will also increase. Hopefully not!
A new name? How about "Costello"??
I think this is a great idea for innovation in the pharmaceutical industry. Challenging the norm is a fresh idea to try. I think the split will cause more focus and specification on different drugs and will therefore enhance their medical credentials and business. I look forward to see how Abbott executes the split of their company and further innovates in the future.
@bampbs
"Big Pharma" spends more on R&D than all other large industries such as energy, automotive, aerospace and defense and computer and electronics. See chart:
http://www.washingtonpost.com/blogs/ezra-klein/post/the-pseudo-debate-ov...
Perhaps it is because we see health-care as a public good that opinions run so high in regards to pharmaceutical companies.
Yes, making medicine to cure is so evil. And the big pharma firms are so evil that they sometimes give their drugs to third world countries. Look up MERC's drug releases in the 1970's...they're so evil.
Now,finally billions of poor people can afford decent medication. Pharma companies are worst of corporate sharks who have build their vast empire on pain, misery and unabashed looting & Governments round the globe are accomplice to this global scam.
Perhaps if Big Pharma stopped spending more on marketing than on research, the new drug pipeline wouldn't be empty.