Abbott CEO, Miles White, made another bold strategic move with the decision to split the company into two separately-traded public entities, which essentially splits-off its proprietary pharmaceutical business. The Diversified Medical Products Company, which will retain the Abbott name and Mr. White as CEO, will include the Medical Device, Established Pharmaceutical, Nutritional, and Diagnostic business segments. The Proprietary Pharmaceutical Company will include the company's branded portfolio and pipeline, and will be led by Abbott's current Head of Pharma, Richard Gonzalez. Each of the four businesses within the Medical Product Company are approximately of equal size (in terms of revenue) with $22b in total sales, while the Pharmaceutical company is expected to generate nearly $18b in sales in 2011. The strategic rationale for this move was the desire to unlock greater value for shareholders, as two independently-traded businesses, since the size of the pharma business and concerns over the sustainability of the Humira franchise have overshadowed the growth prospects and market opportunities in its other businesses.
The key question is why Abbott decided to split-out its branded pharmaceutical business, instead of one or more of its smaller, less profitable businesses, and why its Established Pharmaceutical business, which includes its branded generic drug sales in emerging markets, remains with the Medical Products Company, instead of Pharmaceuticals. Management explained that its research-intensive Proprietary Pharmaceutical business, which generates the bulk of its revenue from developed markets in the US and Europe, is a very different business model than its other consumer-oriented businesses. The company specifically highlighted the difference in payers for these two types of products, with Pharmaceuticals dominated by a few large government payers, and its other business, including its Established Pharmaceuticals (branded generics in emerging markets) dominated by out-of-pocket consumer purchases. The cash flow and investment required to fund the R&D operations of its Proprietary Pharmaceutical business are also significantly greater, and over a much longer time horizon than its other businesses. In addition, the growth profile of its Diversified Medical Products business appears much greater than Pharmaceuticals, because it intends to focus on opportunities in high-growth emerging markets.
Overall, this move by Abbott reflects the changing dynamics of the global healthcare markets, with ongoing pricing and reimbursement pressure creating a more challenging operating environment for branded pharmaceutical products in the developed US and European markets. At the same time, the growth opportunities have become much greater for lower-cost healthcare products that can be marketed to a growing number of healthcare consumers in many of the world's emerging markets. The choice by Abbott to stick with its Diversified Medical Products Company over its Proprietary Pharmaceuticals business clearly highlights their preference for product diversity and market growth over the blockbuster pharma business model. For the stand-alone Pharmaceutical Company the reliance on Humira will increase even further, which intensifies the pressures on the company's pipeline to deliver significant new product opportunities to help support growth by the time of anticipated biosimilar competition to Humira in 2017.