Abbott Streamlines Generic Drug Business With Sale Of Developed Market Assets To Mylan

Global healthcare major Abbott Laboratories (NYSE:ABT) has entered into an agreement to sell a part of its generic drug business to specialty pharmaceuticals company Mylan (NASDAQ:MYL) in an all-stock deal. Mylan will acquire Abbott’s generic drug business in developed markets such as Europe, Canada and Japan and form a new company based in the Netherlands. Abbott will get a 21% share of this new company, which is valued at around $5.3 billion. ^[1]

Generic drugs are part of Abbott’s Established Pharmaceutical division, which generated sales 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 pressure in developed markets such as Europe and Japan. The deal with Mylan, expected to close in the first quarter of 2015, is in line with Abbott’s strategy of focusing on emerging markets to revive growth in the business. By divesting its generic pharma business in established markets (which generated sales of about $2 billion in 2013), the company has re-positioned itself from a player in the low-margin, low-growth generic drug market in developed regions to one focused on the high-growth opportunity in emerging markets such as India, China and Latin America.

As for Mylan, the deal is expected to add more than a hundred products to its generic drug portfolio and enhance its market presence in more than 40 countries. The deal is also expected to reduce the company’s global effective tax rate significantly. ^{[2] [3]}

We have a price estimate of $40 for Abbott Labs, which is roughly in line with the current market price.

See our full analysis for Abbott Labs

Strategic Sale For Abbott

Abbott had been on the look out for potential buyers for its generic drug business in developed markets for the past couple of months in a bid to streamline its operations and focus on higher-growth areas. Sales from the Established Pharmaceutical division have dipped in the last two years due to competitive pressures 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% year-over-year 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. ^[4]

In addition to being an effort to offset declining sales in the developed markets, Abbott’s growing focus towards emerging economies stems from the fact that evolving demographics and improving per capita income in these regions is increasing people’s access to healthcare, thereby creating a very attractive market for pharmaceuticals and medical devices. Since generic drugs are cheaper than branded variants, emerging economies become even more attractive markets for such drugs owing to their price sensitive nature. ^{[1] [5]} ((The New Global Middle Class: A Cross-Over from West to East, Brookings Institution, 2010))

In 2013, emerging markets accounted for about 50% of the company’s overall sales, and this proportion is expected to increase to about 60% in the coming years.

Abbott’s Recent Acquisitions To Expand Generic Drug Sales

Abbott has made two strategic acquisitions in as many months to expand its presence in the generic pharmaceuticals market in emerging economies. The company bought Chile-based CFR Pharmaceuticals for $2.9 billion (excluding CFR’s $430 million debt) in May, followed by Russian pharmaceutical company Veropharm for $395 – 495 million last month.

Abbott’s generic drug business will likely look very different in the near future, with the company rapidly expanding its presence in high-growth emerging markets and exiting the low-growth developed markets. The company’s inorganic expansion in the Russian and Latin American market is likely to aid top line growth in the division going forward. Following the recent emerging market acquisitions and sale of its business in the developed markets, Abbott is likely to generate sales of around $4 billion in the Established Pharmaceutical division next year, with market leading positions in India, Chile, Columbia and Peru.

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1. Press Release, Abbott, July 14 2014 [↩] [↩]
2. Press Release, Mylan, July 14 2014 [↩]
3. Abbott Labs to Sell Generic Drug Assets to Mylan, Reuters, July 14 2014 [↩]
4. Abbott 2013 10-K [↩]
5. Emerging Markets Come of Age, IMF, Dec 2010 [↩]