Abbott’s Generic Drug Business Gets A Boost With Veropharm Acquisition

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Global healthcare major Abbott Laboratories (NYSE:ABT) has completed its acquisition of Russian pharmaceutical company Veropharm for 16.7 billion rubles ($305 million) in an all-cash deal. Veropharm is one of the leading generic drug manufacturers in Russia, and the deal will give Abbott a manufacturing presence in the country. The deal makes sense in light of Abbott’s recent efforts to expand its generic drug business in high-growth emerging markets such as China, India, Latin America and Russia because of sustained sluggishness in developed markets. Per the terms of the deal, Abbott acquired limited liability company Garden Hills, which currently owns 98% of Veropharm. Abbott also assumed Veropharm’s net debt of 4.7 billion rubles ($136 million) as part of the deal. Veropharm is expected to contribute about $150 million to company sales in 2015.

This acquisition follows Abbott’s agreement with specialty pharmaceutical company Mylan (NASDAQ:MYL) to divest its developed market generic drug business and its $2.9 billion acquisition of Chile-based CFR Pharmaceuticals to expand its presence in Latin America. Abbott reshaped its branded generic business this year to focus solely on emerging markets, where it already generates 50% of company wide sales.  ((Abbott Labs (ABT) Completes $305M Veropharm Acquisition, StreetInsider, Dec 12 2014)) ((Abbott to Acquire Veropharm, Abbott Press Release, June 23 2014)) [1]

We have a price estimate of $42 for Abbott Labs, implying a discount of about 10% to the current market price.

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Strategic Benefits For Abbott

Abbott’s Veropharm acquisition is strategically important for two reasons. Firstly, Abbott’s generic drug sales have dipped in the last two years due to competitive pressure and unfavorable macroeconomic conditions in developed markets, and emerging markets such as Russia are likely to be key for future top-line growth in the business. For instance, 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 2013 10-K))

Secondly, in addition to adding a range of oncology medicines, the acquisition is likely to complement Abbott’s current drug portfolio in women’s health, central nervous system, cardiovascular and gastroenterology. Abbott will also likely utilize Veropharm’s existing manufacturing facilities to expand its capabilities and business in Russia.

The Russian government has consistently pushed to curb drug imports and encouraged greater local production of medicines in the country. The government’s preference for domestically produced drugs likely encouraged Abbott to acquire a local manufacturer to gain a foothold in the fast expanding Russian pharma market. [2]

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Notes:
  1. ABBOTT AT CREDIT SUISSE 2014 HEALTHCARE CONFERENCE, Abbott, Nov 11 2014 []
  2. Abbott offers up to $495m for Russia’s Veropharm, PMlive.com, June 24 2014 []