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Investment Overview for Abbott Labs (NYSE:ABT)
Below are some key drivers of Abbott's value that present opportunities for upside or downside to the current Trefis price estimate:
- Revenue From AndroGel, Synagis and Other:
We estimate that Abbott’s other pharmaceuticals segment constitutes more than 35% of the company's value. Abbott has relatively few patent expiries compared to peers. However the company doesn't have a very strong late-stage pipeline. Abbott is banking on various recent acquisitions, which have brought Abbott a large portfolio of pharmaceutical products and an expanded presence in fast growing emerging markets, to drive long-term growth. If these acquisitions fail to translate into meaningful growth, the company's sales remain flat by the end of the Trefis forecast period. This would represent a downside of more than 7% to the Trefis price estimate. However, if these acquisitions complement Abbott's global presence and brand and allow the segment's sales to reach $16 billion by the end of the Trefis forecast period, there would be a potential upside of more than 5% to our price estimate.
- Revenue from Humira:
Humira, a drug for autoimmune diseases, is the world’s second best-selling drug in terms of revenue and constitutes 15% of the Trefis price estimate for the company. Humira is set to face competition from JAK inhibitors, experimental oral drugs that are currently going through phase 3 studies and expected to be launched in early-2013. If the technical studies data are not favorable and/or these trials hit a snag, the drugs may fail to get regulatory approval which would pave the way for Humira to gain additional revenue.
If Abbott is able to leverage its market leading position in the autoimmune segment until its patent expiration and drug's sales exceed our expectations to reach $12 billion compared to our current forecast of $10 billion by 2016, this would present an upside of about 5% to the Trefis price estimate. However, if Humira’s position weakens more than expected as new competitors enter the segment, and its sales falls to nearly $7 billion by the end of the Trefis forecast period, there could be a potential downside of more than 4%.
Established in 1888, Abbott Labs is a diversified healthcare conglomerate with a global presence. The firm operates in four main segments: Pharmaceuticals, Vascular, Nutritionals, and Diagnostic. The pharmaceutical segment includes primary care and specialty care drugs that prevent and treat conditions such as autoimmune diseases, lipid disorders, kidney diseases, prostate cancer, thyroid diseases and HIV.
The nutritional segment includes pediatric, adult, healthy living and sports nutrition products such as infant formulas, snack bars and meal replacement shakes.
The vascular segment includes minimally invasive medical devices for heart diseases, strokes, carotid artery diseases, and other serious vascular conditions.
The diagnostics segment includes systems and tests used for screening for drugs of abuse, cancer, therapeutic drug monitoring, fertility, physiological diseases and infectious diseases such as hepatitis and HIV.
In October 2011, Abbott announced a plan to split its business into two distinct companies in order to unlock value. One company will have products focused on generics, nutritional, diagnostics and vascular products and the other will be focused on research-based proprietary pharmaceuticals such as Humira.
Abbott manufactures one of the world's best-selling drugs, Humira, which accounts for 20% of the company's value according to our estimates. However the company's largest value driver is the Other Pharmaceuticals division which includes products such as Synagis (treatment for respiratory syncytial virus), AndroGel (for males with low testosterone), Lupron (prostate cancer treatment) and anesthesia products. According to our estimates, the division accounts for more than 40% of the company's value due to a variety of factors:
Acquisitions, alliances & licensing arrangements to bolster sales
Various alliances, licensing deals and other partnerships help in reducing R&D expenses. A strong distribution network, tie-ups and brand image due to world class drugs help boost revenues. Various current and future alliances, partnerships and licensing arrangements present significant upside potential for revenue growth.
In 2010, Abbott completed various acquisitions including Solvay Pharmaceuticals, Facet Biotech Corporation and Piramal Healthcare, bringing Abbott a large portfolio of pharmaceutical products and an expanded presence in fast growing key global emerging markets. To strengthen its position in diagnostics, Abbott acquired Starlims Technologies Limited.
In addition, Abbott signed a licensing and supply agreement with Zydus Cadila. Under the agreement, Abbott will gain rights to many Zydus products in major markets, primarily in Eastern Europe, Latin America and Asia, where Abbott has a strong and growing presence.
Expansion in emerging markets to drive growth
In 2011, emerging markets accounted for over 25% of total revenue of the company. Emerging markets are expected to grow at a faster pace than developed markets going forward. Abbott's management has reiterated their intention to tap these high potential emerging markets. In recent years, Abbott has made significant moves to expand its presence and product portfolio in many of the most populous and fastest-growing countries in the world.
Rapidly growing emerging markets
Per capita income levels in many emerging markets is rising rapidly, which provides an immense opportunity for growth in these markets. Also, new studies and increased access to information, have led to rising health consciousness in these markets. However, emerging markets are known for their weak and ineffective patent laws, ultimately limiting the growth.
Growing threat of generic products
The fast-growing pharma market in emerging economies, referred to as 'Pharmerging' economies, have the capability and technical prowess to manufacture generic versions of blockbuster drugs. These generic drugs are often sold at prices that substantially cheaper then their branded counterparts, thereby severely affecting big pharma's ability to generate healthy profits in the long run.
Lack of approval for Biosimilars by FDA
At present the Food & Drug Administration (FDA) does not have a process to grant approvals for Biosimilars. Though it is difficult to predict when such a process would be initiated, the potential impacts would be severe for any big pharmaceutical firm, as it would likely result in a drastic reduction in pricing of Biologics.
Loss of patents
By the end of 2013 over 10 blockbuster drugs are expected to lose patent exclusivity. These branded drugs are set to lose over $100 billion in revenues in the next few years and thus companies such as Abbott will need to develop new drugs to offset these losses.
Global healthcare reforms
Governments around the world have been undertaking significant healthcare reform programs. Some of these programs could effectively cap drug pricing with rebates and other mechanisms.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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