Breaking up - The Deal Pipeline (SAMPLE CONTENT: NEED AN ID?)
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Breaking up

by Jonathan Marino  |  Published November 19, 2012 at 12:15 PM
It's been a year of fervent dealmaking in the pharmaceutical space. Many of the titans of the industry have been paying exorbitant premiums to pluck up biotechs to aid in pipeline growth, leading to a bit of a rebirth for biotech stocks as investors fantasize about prospective windfalls. Yet completely absent from 2012's big-name biotech buyouts has been Abbott Laboratories. Which is fine with the Abbott Park, Ill.-based healthcare conglomerate, because it is busy finalizing perhaps the biggest move in its history: splitting itself in two.


Abbott is only a short time away from turning itself into two distinct, multibillion-dollar entities: a pure-play, research-based pharmaceutical business to be dubbed AbbVie and a diversified medical products business that will retain the Abbott name. The big split is the culmination of several years of rapid growth that has been augmented by key strategic acquisitions. From 2007 through 2011, Abbott has done 17 deals ranging in size and scope across the board -- some licensing agreements, stakes and outright acquisitions.

It has also done a spinoff once before, though on a smaller scale, when eight years ago it spun out its hospital supply business into what is now known as Hospira Inc. The current split has been years in the making. "If you look at what Abbott has gone through in the past 12 to 13 years, the company has seen incredible growth," said William Chase, Abbott's vice president of licensing and acquisitions, who will transition to AbbVie's chief financial officer once the split is finalized in January 2013.

"We got to the point that the company went from $12 billion in revenue to about $40 billion dollars, and in the process became very broadly diversified, but with a huge pharma business," Chase said. That kind of rocket-fueled growth has brought Abbott to a threshold other competitors have already crossed, as Bristol-Myers Squibb Co., Covidien plc and Pfizer Inc. have also separated out their healthcare and drugmaking businesses.

A number of big deals the past two years have helped lay the groundwork for the split. The $3 billion purchase in 2010 of India's Piramal Healthcare Ltd.'s healthcare solutions business and the $3.73 billion buyout of Solvay Pharmaceuticals SA in 2009 were very different businesses that were pulling investors in two separate directions. There comes a point when too much bulk in divergent businesses hinders overall growth -- a theme has been resonated throughout corporate America since the 2008 financial crisis.

"The thinking is, these companies are so massive that you don't get the synergies anymore," said one lawyer who is a pharma industry veteran. "You shouldn't be in too many segments anymore or you can't properly compete."

Looking more closely at the underlying businesses, Abbott's pharmaceutical group fundamentally clashed with its legacy business. Pharmaceutical companies are very research focused, have long research and development timelines and products that are largely patent protected. Abbott's legacy business, which specializes in a variety of branded generics, medical devices and diagnostics, is a broad-based collection of divisions that have fairly short R&D timelines and life cycles, Chase explained.

"Management realized ultimately you can unlock value by letting the two companies go their own way and appeal to each investor class," he said.

For much of 2012, Abbott has been absent from large-scale M&A, but nonetheless has been very active in accumulating a pipeline of drugs for the AbbVie business through a series of partnering deals of various sizes. Some suggest the company is preparing for when the patent for one of its biggest success stories -- the Humira drug approved for rheumatoid arthritis in 2002 -- expires in 2016. Humira is arguably, from a financial perspective, one of the most successful drugs of the past decade. The drug accounted for $7.9 billion, or 20%, of Abbott's $38.85 billion in revenue in 2011 and north of 40% of the $17.64 billion in revenue that the AbbVie business brought in.

Humira itself is a story of dealmaking success. Abbott purchased the drug in 2001 through its $6.9 billion acquisition of Knoll Pharmaceutical Co., a division of Germany's BASF AG. At the time it was a Phase 3 compound known as D2E7. Abbott subsequently maximized the earnings potential in Humira, winning Food and Drug Administration approvals for the drug in rheumatoid arthritis, Crohn's disease, psoriatic arthritis, chronic plaque psoriasis and other indications.

The move has paid off in spades as Abbott gets ready to pocket sales that analysts believe could surpass $9 billion for 2012. With that kind of anticipated revenue growth, Humira is about to become the top-selling drug in the world, eclipsing Pfizer's Lipitor, which had $9.6 billion in sales in 2011 but lost patent protection in November of that year. However, AbbVie will be under pressure to find new sources of revenue once the Humira patent expires, paving the way for generic competition.

Abbott, well aware that Humira's clock is ticking, has not been sitting on its hands. Prior to announcing the split in October 2011, Abbott formed a partnership with privately held biotech Reata Pharmaceuticals Inc., paying $450 million in up-front and near-term cash payments for the licensing rights to a midstage compound for chronic kidney disease and a minority equity stake in the company. Abbott expanded the deal in December, paying Reata a one-time $400 million license payment to jointly develop and commercialize a group of oral antioxidant inflammation modulators, or AIMs, covering a wide range of therapeutic areas including central nervous system disorders and immunology. Though the CKD drug flamed out in Phase 3 trials in October, the partnership for the AIMs is still intact.

Abbott also has a multiple sclerosis drug in the pipeline that came from its $722 million acquisition of Facet Biotech Corp. in 2010. In February, it agreed to pay as much as $1.35 billion to Galapagos NV for the rights to a Phase 2 oral compound for rheumatoid arthritis, a potential supplement or even replacement for the injectable Humira. The deal represented one of the largest up-front licensing payments for a Phase 2 drug in history. It then moved on to Action Pharma A/S, paying $110 million for a drug in Phase 2b development to treat acute kidney injury, or AKI, associated with major cardiac surgery. That drug furthered AbbVie's presence in renal disorders.

It capped off a busy year of licensing deals by expanding a previously small collaboration with Seattle Genetics Inc. into a financially significant partnership regarding antibody drug conjugates, or ADCs, a next-generation group of cancer drugs that is one of the hottest fields in the pharmaceutical sector. Abbott will pay Seattle Genetics up to $220 million in potential milestone payments for each new drug the two discover through the collaboration.

"Three or four years ago, senior management got very, very focused on the pharma pipeline, and that went all the way to the top," Chase recalled. "We've been very involved looking to find ways to augment our pipeline with external opportunities. Some of that is done through small acquisitions, some of them are structured deals, and some of them have opt-in rights down the road."

Abbott's partnerships, in conjunction with the company's own internal pipeline, have given AbbVie enough ammunition to believe it is not just a Humira company. The company is one of the few pharmaceutical groups to possess all the in-house elements for an all-oral regimen to treat hepatitis C, representing an enormous market opportunity. And it has plenty of ammunition, with some 20 compounds in either phase 2 or phase 3 development. That means Abbott has had to rely less on leveraging growth through acquisitions. "Some of the larger transactions have been less attractive to us because we're pretty optimistic about our pipeline," Chase said.

That optimism will need to translate into results going forward, however, when the Humira patent expires. "That's the million-dollar question: When does Humira start to lose its mojo?" Leerink Swann LLC analyst Danielle Antalffy asked. "I think the Humira growth story still has legs, [but] do those legs get [AbbVie] to the point that the new drugs come online?"

Chase said the company's acquisitions continue to be oriented around the same growth objectives Abbott has always pursued and that more recent deals have not been made with the imminent split in mind. Chase said he continues to follow five separate key criteria for assessing an acquisition: how the target fits with the business; what the markets are that the company is interested in getting into; how innovative the technology is; whether the therapeutic target is an unmet medical need; and whether the deal will increase shareholder value.

"Those were the screens we were applying to the market as we looked to do licensing and acquisition activity," he said. "We were buying these things because each asset had compelling value from a fit standpoint and a commercial standpoint."

Which isn't to say that Abbott hasn't missed opportunities along the way. Antalffy, for one, believes that Abbott missed its opportunity to jump on Edwards LifeSciences Corp. -- the maker of the only transcatheter aortic valve implantation, or TaVi, system currently approved in the U.S. -- before it grew into a company with a roughly $12.5 billion market capitalization.

One of the big questions in the market is, what's next? Some observers believe that the split is a prelude to the next pharma megamerger. As soon as the company announced the split last year, many have speculated that AbbVie will be a buyout target the second it's on its own.

"There's a little bit of a hope that this gets gobbled up by someone else," the pharma lawyer veteran said. "I personally think that's the game and that's been the game from the beginning. What they've done here is all about building something that someone will want to acquire, and that's where they make the premium."

Chase dismisses this idea, arguing that Abbott's intention is to "sustain two strong, independent companies."

"We believe that both companies have the size, scale, portfolios, pipelines and people to succeed on their own over the long-term," he said.

Whatever the outcome, analysts expect more deals once the split is official. Antalffy, for one, expects the diversified products business to be the more active dealmaker of the two in the near term. She suggests the company could look to acquire a TaVi system to compete with Edwards, or a target specializing in vascular imaging. If so, Volcano Corp. might be an ideal target, Antalffy suggested, as the company does vascular imaging for both diagnostic purposes and post-implant. And it would be more manageable than Edwards given its roughly $1.5 billion market capitalization.

She suggests AbbVie is less likely to go on an acquisition spree because it will be taking on a portion of Abbott's debt through the split. AbbVie will indeed be levered up: On Nov. 6, it launched a $14.7 billion senior notes offering -- the largest ever dollar-denominated debt issuance in the U.S. high-grade market -- to help finance the move. In regulatory filings prior to the announcement, AbbVie estimated that it would have $15.7 billion in debt compared to roughly $7.2 billion in cash.

"The Abbott legacy business has all the debt on the balance sheet now," she explained. "AbbVie [had] to raise debt to pay off the Abbott debt they're taking on. I don't see AbbVie being super acquisitive for that reason."

If the portfolio it has put together comes through, perhaps it won't have to be.

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Tags: Abbott Labs | AbbVie | buyout | healthcare | Humira | M&A | pharmaceuticals | Piramal Healthcare Ltd. | spinoff | split | William Chase

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