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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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October 20, 2011

Abbott Cuts the Drug Business Loose

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Posted by Derek

So Abbott is spinning off the pharma business into a separate company - did anyone see that coming? (I take a day away from the computer, attending a meeting, and this happens). Let's look at this plan and try to figure it out.

First off, this is obviously a reaction to worries about prospects for the pharma side of Abbott's business. The medical devices side is doing fine; it's not like the high-flying pharma organization is trying to toss out a sandbag or something. A lot of that worry is probably centered around the long-term prospects for Humira, which is operating in an increasingly crowded space and accounts for a rather large share of revenues all by itself.

So in that sense, this is a move peculiar to Abbott. But the thinking behind it is common to all the large drug companies, as this Wall Street Journal story details. It's just that various companies are running off in various directions in response. You have some saying "Gosh, we've just got to get back to our core business and do pharma better", while others say "Gosh, we've got to diversify - let's get some consumer products in here, some medical devices, animal health, anything less crazy than drug discovery". And even allowing for the fact that these companies are starting off from different places, with different levels of difficulty, it seems clear that no one really has a strategy that's convincing enough even to themselves. Something Has to Be Done, so everyone's doing Something, and hoping for the best.

But in this case, you have to worry that the (so far unnamed) drug company that Abbott's spinning off will have its work cut out for it. The new company will be getting, what, three quarters of its revenue from Humira? That's a rough situation for any company with any drug, much less a drug that's heading into white water. And how much of the rest of the revenues are from TriCor and Niaspan, both of which face patent expirations? I know that they have things in the clinic, sure, but it's hard to see how this new company doesn't shed jobs at some point. I had a series of worried e-mails waiting for me last night from Abbott pharma people, and I think that they're right to be worried. I'd be very glad to hear counterarguments, let me tell you.

No, when you look at it, the company seems to have decided that amputation is just the cure that they needed. The fact that the Abbott name is staying with the medical devices company is all you need to know.

Comments (21) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. Petros on October 20, 2011 7:51 AM writes...

Surprised me too when I saw this. And its the second time Abbott's done this. Last time it led to Hospira being flaoted

But the portfolio of products is very mature. Hospira may be proof against biosimilars but there is nothing much else. and its a long time since abbott gave a detailed pipeline overview

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2. anchor on October 20, 2011 7:58 AM writes...

To me it is a ringing endorsement that its medical device and diagnostics units are hale and healthy but the pharma business is sick and they see no way out. By sorting out the healthy one from sick it also tells me that they have forsaken the core business coming out of pharmaceutical products. Derek, as you have mentioned the core pharma business coming off Humira must be a source of constant worry and rest you can imagine the fate when it comes off patent, the biologics and other sundry issues. Separation is the first step to be given away at the appropriate time for eligible suitors at a later point.

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3. DG on October 20, 2011 7:59 AM writes...

Missing from the analysis so far is some historical reflection on Guidant's role. Recall that Guidant was the device spinoff of Lilly in the mid-90s, at which point Lilly decided that the device and pharma models were too different to keep together. Lilly got rid of the device piece because at that time (prior to stents or the growth of ICDs) devices were a low margin business. (Lilly employees who chose to go with Guidant were considered crazy to leave big, rich pharma for low margin devices.)

Nearly 20 years later, Abbott decides that the device and pharma models are too different to keep together, but gets rid of the pharma piece and instead keeps Guidant.

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4. Wallace Abbott on October 20, 2011 8:15 AM writes...

This move caught us all off guard, without question. There's a lot of questions/concerns we all have, and I think Derek summed them all up very well in his analysis.

Most of us also feel that we become a very attractive take-over target for someone wanting to get a piece of the last 5 years or so of Humira's revenue (along with Kaletra), which will be eroding, but will still be a robust high single digit to low double digit billion dollar seller for the next 5 years or so.

We expect to see a lot of 50 somethings opting to retire from Abbott before the seperation, mainly to keep their pension and retiree health benefits, things that many of us feel will not be a part of the new entity. Job cuts will most likely be coming as well as to get leaner and less expensive.

Our ranks have been whittled over the last 5 years between 2 layoffs and un-replaced attrition in the scientific ranks, to be cut loose to swim with the sharks.

Interesting times, for sure.

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5. David Formerly Known as a Chemist on October 20, 2011 9:08 AM writes...

It's unfortunate for the employees, and I wasn't expecting it, but now that I see it happening I can't say I'm surprised. I predict the pharma business will be purchased by another pharma company solely for the product line (i.e. Humira), or possibly taken private via private equity. If you look at the approved products in the pharma business they comprise a pretty small collection, with Humira leading the pack by a very wide margin. When is the last time Abbott's internal discovery program developed an approved NCE with significant sales? Ritonavir? That was a long time ago. Their other significant products came via acquisitions (Solvay, Knoll). I'd be very surprised to see the pharma business go on as an independent company.

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6. David Formerly Known as a Chemist on October 20, 2011 9:19 AM writes...

By the way, I see that Amgen is cutting it's staff by 6%, heavily in R&D.

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7. Hap on October 20, 2011 9:26 AM writes...

Why are medical device businesses considered more financially secure than drug companies?

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8. Henning Makholm on October 20, 2011 9:48 AM writes...

"Something Has to Be Done, so everyone's doing Something, and hoping for the best."

Isn't that how market capitalism is supposed to work? Doing everyhting and hoping for the best allows us to chance upon solutions that no right-minded central planner would have dared to bet everything on.

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9. Mike on October 20, 2011 10:03 AM writes...

No disrespect intended, Derek, but there is one major exception to your claim that the thinking behind Abbott's move is "common to all the large drug companies". Johnson & Johnson has kept with the same strategy of diversification for quite some time. They have ~1/3 of their business in each of pharmaceuticals, medical devices, and consumer products. It has worked well for them over the years. Each division has had its ups and downs in the short term; but combined, the company has been remarkably stable in the long term.

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10. anon 1 on October 20, 2011 10:06 AM writes...

...."good bank, bad bank.....

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11. leftscienceawhileago on October 20, 2011 10:16 AM writes...

...and calls it 'Drugster'.

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12. Jim on October 20, 2011 10:21 AM writes...

@#7 Hap - depending on the type of medical devices, there can be significantly less regulatory hurdles to get a product to market. Class II devices need only a 510(k) approval, which basically demonstrates that your product is essentially the same as another marketed product. As such, no clinical trials are required for approval, but they may be required in order to be covered by insurers.

@#9, Mike - I agree with your statements about J&J, but their approach to running their business units as very separate companies kind of makes them their own case, don't you think?

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13. HelicalZz on October 20, 2011 10:24 AM writes...

The fact that the Abbott name is staying with the medical devices company is all you need to know.

Agree. But is this a bigger item than it appears? Certainly the situation is a bit unique to Abbott, but this is still the first time I've seen 'the street' seemingly encourage the pharma unit to be shed. It is generally the other way around, with the lower margin businesses argued to 'bring down the multiple a pure pharma could command' (groan).

But is this still even true?

I took a look at JNJ when they announced the Synthes acquisition. In 2001, Pharma was 46% of sales and 62% of operating income (Op margin 33.2%), in 2010, it was just 36.4% of sales and 40% of operating income (Op margin 31.6%). Meanwhile in the same period medical devices and diagnostics (MD&D) went from 34.5 to 39.9% of sales, and 25.2 to 46.7% of operating income . Operating margins expanded from 18% to 33.6%.

One can easily argue that MD&D is a better business than pharma for JNJ. It sure isn't worse, and it has been only looking better as the years have gone by.

Is it any surprise JNJs last real big acquisition (Synthes - still pending) was in MD&D and not pharma? Or that Abbott recognizes that the once lauded pharma business going forward just may not be what it used to be? My surprise is more that they are spinning out rather than selling the unit outright to another major. As Derek noted, Humira will be an uncomfortably large % of sales for the stand alone NewCo (heck, it is for integrated Abbott), and competition in this indication is likely coming (the JAK inhibitors).

The InVivo blog poll for those who didn't see it yesterday.
http://invivoblog.blogspot.com/2011/10/help-name-abbotts-pharma-newco.html

Zz (long JNJ)

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14. George on October 20, 2011 11:25 AM writes...

In stead of Abbott, maybe new company can be named "Abort"?

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15. Anonymous on October 20, 2011 12:42 PM writes...

@#5 Wallace, I've been getting phone calls from temp agencies offering to do org.syn. at Abbott for about 50k/y. That's probably how they plan to get by.

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16. CMCguy on October 20, 2011 3:03 PM writes...

Isn't Abbott pharma business already overwhelming "Marketing and Sales" focused already so just another move to model of drug/generic company that if have R&D it more for show than pipeline flow? I may be wrong with impression internal Abbott drug R&D has been largely unproductive (worse that average?) for decades with most new product introductions are through partnerships or acquisitions (more so than average?). Although touted as diversity similar as J&J hasn't Abbott really been stronger in devices and other areas which been more innovative and profitable to carry the pharma side (to support the acquistions)? Didn't Wall street applaud that organization once so is a split now a push to appease those who sense better short term benefits because can reinvent as New-Name Abbott Generics?

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17. Matthew Herper on October 20, 2011 6:16 PM writes...

Jami Rubin at Goldman Sachs has been predicting this for almost a year:
http://www.forbes.com/sites/matthewherper/2011/10/19/abbott-ditches-its-drug-business/

I do subscribe to the idea that this shows that it's just gotten too hard to get credit in pharma.

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18. Anonymous on October 20, 2011 6:41 PM writes...

Who cares what they or other pharma co's spin off. As long as they don't spin off hard working employees!

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19. cliffintokyo on October 20, 2011 9:37 PM writes...

I wrote on Pharmalot (hi Ed) that I *predicted* this.
What I meant was, I put a comment on "In the Pipeline" last year that basically said, now that pharma mammoths have become too big to manage/ innovate, the only way forward would be to break them up again.
I am more optimistic than most poeple that Abbott expects both businesses to benefit and prosper.
Regarding the J&J *exception*, their recent OTC GMP troubles just serve to show how difficult it is to police standards effectively across huge organizations.
You have to pay Middle Managers enough for them to make the commitment - the MM in commit also stands for Motivation and Money.

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20. petros on October 21, 2011 8:17 AM writes...

Major pharma was too big to facilitate innovation even before the recent round of mergers.
Size breeds bureaucracy which stifles innovation.

look at Mintzberg's comments on that (not pharma specific BTW)

But I'd agree that Abbott has a poor record of bringing new drugs through its pipeline
It's 6 top selling drugs are:

Humira acquired with Knoll (and originated by CAT)
fenofibrate formulations (mostly) originated by Fournier
Niaspan acquired with Kos
Lupron originated by Takeda
Synthroid is a formulation of a natural hormone

Only Kaletra was invented at Abbott


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21. Doug Steinman on October 26, 2011 8:15 AM writes...

As a former employee of Abbott pharmaceutical research who was forced to retire let me add my perspective to this discussion. Abbott management has, for awhile now, viewed the pharma business as a liability. Pharma research there is micromanaged, is not adequately funded and there is far too much me-too research. I was part of a research group that had a proud tradition of innovation and success until a management change turned it into a floundering morass. I believe that Abbott pharma has about 6 months before they are acquired and another 10,000 jobs are lost.

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