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ABT AT A GLANCE

P/E ► 14.1 AVG EV/EBITDA ► 10.1 AVG ROA ► 13.6% AVG ROE ► 30% AVG Debt to Equity ► 1.53 AVG Current Ratio ► 1.53 AVG Interest Coverage Ratio ► 14.0 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating Expenses Research & DevelopmentSG&AAmortization & Depreciation

Abbott Laboratories (NYSE: ABT) is the largest company in the nutritional products market and the second largest company in the worldwide market for diagnostic products. The company manufactures a number of nutritional and pharmaceutical products, laboratory diagnostics, pharmaceutical therapies and medical devices, including the arthritis medication Humira and the coronary stent Xience. Abbott had total sales of $29.5 billion in 2008. Abbott Labs' recent acquisitions of Kos Pharmaceuticals and Guidant Corporation have contributed to Abbott's competitiveness in the highly profitable vascular stent market.

In recent years, Abbott has shifted its focus to the pharmaceutical industry. Abbott can expand by either obtaining FDA approval on new products or adding new indications for already existing products, such as Humira. Medicare reform also has a significant role in the success of drugs--new coverage of Humira may cause a spike in demand for the drug; Abbott will profit even more if new medication receives similar coverage in the future.

Abbott and the rest of the pharmaceutical industry are continually under pressure from expiring patents. Patent expiration allows generic drug companies to lower prices for a certain medication by producing their own versions, increasing competition for that product's market.

[edit] Corporate Overview

[edit] Products

Abbott Labs' products fall into three categories or production divisions: medical, pharmaceutical, and nutritional. Over the past five years, the revenue distribution from each of these these divisions has held fairly steady, with Pharmaceuticals consistent as the highest earner. Medical products are on an upwards growth curve, however, and may equal or surpass pharmaceuticals in importance--especially if demand for vascular stents remains high.

• Medical Products ($2.8 billion, 9.5% of 2008 revenue) ^[1]

These range from blood glucose test kits to surgical devices and coronary stents. Abbott's new drug-eluting stent Xience V has shown strong growth, doubling in sales in a year and becoming the best-selling stent of its kind in the U.S. market.^[2] Clinical trials proved Xience V to be safer and more reliable for treating clogged heart arteries than its competition. In particular, one clinical trial demonstrated Xience V to be clinically superior to its competitor Boston Scientific's Taxus stent. Abbott's acquisitions of Kos Pharmaceuticals and Guidant Corp will add depth to Abbott's medical product pipeline.

• Pharmaceutical Products ($15.7 billion, 53% of 2008 revenue)^[3]

Abbott's main revenue-generating pharmaceuticals are Humira and Depakote, which together make up 43% of the pharmaceutical division's revenues. Humira, Abbott's #1 selling medication, is used to treat rheumatoid arthritis; Depakote is used to treat epilepsy and bipolar disorder. Abbott also develops Niaspan, which is the only drug on the market capable of decreasing cardiovascular risk by increasing HDL, or "good" cholesterol.

• Nutritional Products ($4.9 billion, 16% of 2008 revenue)^[4]

The nutritional products division has been a steady source of revenue for Abbott. Abbott's most well-known brands include Ensure, a meal replacement shake, and ZonePerfect snack bars.

[edit] Business Growth

In 2009 Q1, sales decreased by 0.7% compared to the previous year to $6.72B. This came from 5.4% growth in operational sales, coupled with a 6.1% loss due to currency movements. Total international sales rose 10.9% to $3.72B, while US sales decreased 1.3% to $3B. Net income rose to $1.44 billion from $937 million. Humira remains the main growth and profitability driver for the company, with Q1 sales of $1.02 billion, up by 16.7% due to its continued expansion into the rheumatology, dermatology, and gastroenterology markets. ^[5]

Abbott's coronary and drug-eluting stents showed particularly strong growth, with total stent sales doubling to $402 million from a year ago. Abbott's new Xience stent has become the best-selling stent of its kind in the U.S. market, with market share in the mid to upper 20's.^[5]

In December 2008, Abbot announced plans to acquire Ibis Biosciences from Isis Pharmaceuticals (ISIS) for $215 million. The company expects the acquisition to help advance its position in detecting infectious agents, specifically in hospitals. ^[6] As of June 2009, the company continues to be open to growth through mergers and acquisitions, specifically seeking to expand its non-pharma business. It does not appear, however, to be looking for the same scale deals as those of Pfizer (PFE)/Wyeth (WYE) and Merck (MRK)/Schering-Plough (SGP). ^[7]

[edit] Trends and Forces

[edit] Government regulation challenge

Abbott Labs and its competitors are all heavily affected by government regulation. This includes both long-term challenges like required FDA approval and patent expiration, and acute sudden changes like Medicare reform. These regulations are primarily affected by political factors.

[edit] FDA approval

FDA approval is crucial for the success of Abbott Labs--without it, Abbott cannot put new drugs on the market. Currently awaiting approval from the FDA is Abbott's new drug-eluting stent (DES), Xience V. The drug had successful clinical trials and is projected to break into the highly-profitable DES market by the end of 2008 if approved by the FDA. But if Xience V even experiences approval delays, Abbott's chances of breaking into the DES market could be hurt.

Humira, Abbott's top selling pharmaceutical product, is also awaiting new approvals from the FDA, this time to allow Humira's use in treating new diseases. Humira had over US$ 3 billion of sales in 2007; if new indications for Humira are approved, it will give the already high sales another boost and allow Abbott to reach patients across the pharmaceutical market.

[edit] Expiring patents threat

Expiring patents are inevitable and a threat to all companies in the pharmaceutical market. More than half of Abbott's revenues are generated by the pharmaceutical division. With expiring patents and an extremely competitive generic drug market, Abbott's pharmaceutical revenues could experience a drop in sales.

[edit] Strong pipeline; diverse businesses

Expiring patents will have the greatest effect on Abbott's pharmaceutical division, so if Abbott can successfully maintain a diverse business spread beyond pharmaceuticals to nutritional, and medical as well, it can insulate itself from the drop in profit caused by patent expirations or drug approval troubles. Currently, Abbott's nutritionals division generates 20% of its revenue, but still might not be enough to offset a heavy loss of pharmaceutical revenue due to expired patents and generic competitors. The performance of Abbott's Xience V drug-eluting stent will be important for boosting profits in Abbott's medical division.

[edit] Generic pharmaceuticals: direct competition

Although Abbott has a diverse product line spread throughout the pharmaceutical, nutritional and medical products industries, Abbott's main focus has shifted onto the pharmaceutical industry in recent years. The threat of FDA approval of generic drugs has put a lot of pressure on the pharmaceutical industry. Of Abbott's 70 drug patents, the most threatened (expired or due to expire in the near future) are:

• Biaxin (expired 2005): this antibiotic has already experienced a 33% sales decrease since losing its patent.
• Depakote (expires January 2008): this prescription drug treats migraines, bipolar disorder, and epilepsy, and is Abbott's second best selling pharmaceutical product. Abbott's sales will be especially hurt by a sharp decrease in Depakote sales due to generic competitors.

[edit] Medicare coverage patterns

Health coverage is an important determining factor when patients and doctors choose among various treatment options, and Medicare coverage is particularly significant in that it directly affects the drug choices of about 20% of the US population.

Recent Medicare reform resulted in expanded coverage for two treatments for rheumatoid arthritis: Abbott's Humira and Amgen's Enbrel (previously Medicare only covered Johnson & Johnson’s Remicade). Now that Humira can be reimbursed under Medicare, its market share (and that of rival Enbrel) are expected to increase. However, as Medicare coverage extends over time to cover other rheumatoid arthritis medications, competition may force Abbott to lower prices.

[edit] Effect of US politics

Under the Medicare Modernization Act (MMA), drug prices are negotiated between private drug manufacturers and private drug plans which prohibit government interference from participating in negotiations and setting up a price structure. The Democrat-heavy Senate is exploring new ways to lower drug prices, which could decrease revenue throughout the pharmaceutical industry. If Abbott is forced to lower their drug prices, they will be hard hit--more than half of their total sales come from pharmaceuticals.

The results of the 2008 election will affect Abbott's pharmaceuticals industry by playing a major role in Medicare reform.

[edit] Effect of clinical trials

Abbot's success is intimately related to physician practices, the rate at which doctors recommend and prescribe Abbott's products. Physician practices are in part based on the results of clinical trials--successful trials tend to encourage more doctors to prescribe medications, raising sales of that drug.

[edit] Major Drug Manufacturers

While there are a great number of smaller publicly traded drug companies, the top firms represent the majority of the market. The following companies are each active in multiple therapeutic areas, whereas smaller firms generally specialize in a very specific product market.

[edit] Abbott versus the Competition

For a company in the high-speed and constantly changing health care industry, capturing market share must be the primary focus. Market share can be spiked up either by introducing new drugs or by obtaining new indications for existing drugs, increasing demand for the medications.

Humira is currently awaiting FDA approval for several new indications including Crohn's Disease and psoriasis after excellent results in clinical trials. Humira faces competition for the treatment of Crohn's Disease and psoriasis from Johnson & Johnson (JNJ) and Amgen (AMGN). If Humira is approved for those new indications, Abbott could shift market share away from these competitors.

Abbott's Xience V is also being pushed to seize market share, this time in the lucrative drug-eluting stent market--currently populated by only two main players, Boston Scientific's Taxus and Johnson and Johnson's Cypher. Combined, these two companies hold more than 90% of drug-eluting stent market. Johnson and Johnson's recent acquisition of Conor Medsystems may benefit Abbott if the Xience V is approved in time to pick up some of the lost market share from Conor. Abbott competes with St. Jude Medical (STJ) in the vascular closure device market.

Abbott's toughest competition may still be generic drug manufacturers, however. A slew of expiring patents makes Abbott's sales very vulnerable to competition from generic drugs, whose low prices make it difficult for Abbott to compete.

Abbott will have to continue investing more in R&D in order to stay ahead of the tough competition, both from generics and from companies like Johnson and Johnson. In 2006, Abbott's R&D spending was significantly less than its competition.

[edit] References

1. ↑ ABT 2008 10-K Pg. 32
2. ↑
3. ↑ ABT 2008 10-K Pg. 32
4. ↑ ABT 2008 10-K Pg. 32
5. ↑ ^{5.0 5.1} Abbott Laboratories Q1 2009 Earnings.
6. ↑ Reuters. "Abbott Labs to buy Isis unit in $215 mln deal." 17 Dec 2008
7. ↑ Reuters. "Abbott seeks to grow non-pharma side of business." 19 Jun 2009.