Healthcare major Abbott Laboratories (NYSE:ABT) has struggled to boost the sales of its generic drug business in recent years. Generic drugs are part of the company’s Established Pharmaceutical division, which generated revenue of about $5 billion in 2013. The division’s sales have seen a low-to-mid single-digit decline in the last few years, owing to pricing pressures in developed markets such as Europe and Japan. Last month, there was speculation that the company may look to divest a significant part of this division in a bid to streamline its business and return to growth. Although the speculation could not be confirmed, such a sale could help the company exit the low-margin, low-growth generic drug market in developed regions to focus on the high-growth opportunity in emerging markets such as China, India and Latin America (read Abbott May Be Looking To Divest Part Of Generic Drug Business).
While there is no update on Abbott’s plans to divest, the company’s recent acquisition of Chile-based pharma company CFR Pharmaceuticals is in line with its plans to get back to sales growth in the generic drug business. Abbott stated in a press release after the deal announcement that the acquisition will more than double its branded generic drug business in Latin America and establish the company among the top 10 pharma companies in the region. The $2.9 billion deal (excluding CFR’s $430 million debt) is expected to close by the end of the third quarter this year and be accretive to Abbott’s earnings from Q4 2014 onward. The company expects CFR to generate $900 million in sales in 2015, and grow in the double digits over the next several years. 
We have a price estimate of $40 for Abbott Labs, which is in line with the current market price.
Abbott’s Generic Drug Growth Conundrum
Abbott spun off its proprietary pharmaceutical business as Abbvie (NYSE:ABBV) in 2013 but retained its portfolio of branded generic medicines. This portfolio is currently comprised of well-known drugs such as Creon, Biaxin, Klacid, Klaricid, Influvac, Serc, Brufen, Synthroid, Duspatal, Dicetel, and Duphaston. The Established Pharmaceutical business is Abbott’s third largest division and contributes about 22% of its valuation, according to our estimates.
Sales from the Established Pharmaceutical division have dipped in the last two years due to competitive pressure and unfavorable macroeconomic conditions in some developed markets, partially offset by strong sales in emerging markets. Operational sales in the company’s 14 key emerging markets, which include Brazil, China, Russia and India, increased 6.3% in 2013 and 12.8% in 2012. In contrast, Abbott’s generic drug sales in developed markets and other regions (excluding key emerging markets) declined 4% in 2013 and 5.6% in 2012. 
Abbott’s generic drug business will likely look very different in the near future, with the company either rapidly expanding its presence in high-growth emerging markets or exiting the low-growth developed markets, or both. The company’s inorganic expansion in the Latin American market is likely to aid top line growth in the division going forward. However, we expect overall sales growth for the division to be modest in the near term as declining sales in developed markets could offset most of these gains.
Growth Opportunity In The Latin American Pharma Market
The pharmaceutical market in Latin America was estimated at around $45 billion in 2011, and we estimate that the market grew to around $60 billion in sales by 2013.  The market is expected to continue its double-digit growth over the next five years to reach around $124 billion by 2018, according to IMS Research. ((ref:2)) Thus, there is a huge opportunity for Abbott to improve its declining generic drug sales by focusing on this region and capitalizing on the rapid market size expansion.
The acquisition is also likely to help the company improve its profit margins. The generic drug markets in developed regions such as Europe and Japan are almost saturated in terms of products and competition, and therefore offer lower margins. Emerging markets such as Brazil, China and India are likely to provide an opportunity to the company to improve profit margins with localized, cost-efficient R&D centers and new innovative products.Notes: