Christopher Kim
Pratik Kothary
Clifford Leung
Avinash Nagaraja
Company Snapshot
• Diversified healthcare products maker:
– Drugs, Medical Devices/Equipment, and
Nutritional Products
• Founded in 1888, went public in 1929
• Now operates in 130 countries with 72,000 employees
• With $29.5B of revenues, 9th largest
‘Big Pharma’ company
Founder: Wallace Calvin Abbott
Thesis
The healthcare industry has reached an
unprecedented period of transition, out of
which Abbott is optimally positioned to
outperform its competitors.
Agenda
1. Industry Overview
2. Company Overview
3. Product Analysis
4. Risks
5. Valuation
Industry Overview
How Big Pharma Works
High
R&D
15.8%
Low
COGS
18.0%
High
SG&A
32.6%Percent
of
Revenue
(4 yr Avg)
Porter’s Five Forces
Profit Margin
23.9%
Era of Transition
• Big patent cliff in 2010-12– Big Pharma on average: approx $5.1 billion of revenue will be exposed
to competition
• M&A and consolidation across the industry– Pfizer-Wyeth, Merck-Schering Plough, Roche-Genentech
• Vulnerable weakness across industry =
Blockbuster drug model still viable?
Threats to Growth
• Government– Healthcare reform
– Negatives: increasing price rebates,
drug reimportation
– Positive: new research funding,
increased coverage
• Recession– Not so recession proof
• Generic drug competition
No wonder…
Is Medicaid Reform Really a Problem?
Segment Analysis For Top Drug Companies
Company % U.S.
Revenues*
Est. %
Govt. Biz
% At Risk
Exposure
Abbott Labs 48% ~8% ~4%
Bristol-Myers 59% ~14% ~9%
Johnson &
Johnson 51% ~9% ~5%
Merck & Co. 56% ~10% ~6%
Eli Lilly & Co. 54% ~18% ~10%
Pfizer, Inc. 42% ~6% ~3%
Wyeth, Inc. 47% ~5% ~2%
*Revenues include all operations, not just Pharmaceuticals
Abbott’s Status:• Low exposure to Medicaid• High % of sales outside US
Opportunities for Growth
• "Health care is the growth industry of the 21st century.“– Wall Street Journal
• Growth in health-care spending is likely to rebound when the recession ends, a function of the enormous advances in medical technology and Americans' strong appetite for health care.
• President Barack Obama named the sector one of his three pillars of the future U.S. economy, alongside energy and education.
• Health expenditures as a share of gross domestic product have more than tripled in the past 50 years to about 16% today, and the government's Centers for Medicare and Medicaid Services say that figure is likely to hit 20% within a decade.
Reasons to be Excited
• Coming out of recession
• International market
• Baby boomers aging
– 19% of the US pop. by 2030
– Longer life expectancy = buy more drugs for a
longer time
– Rising incidence of chronic disease
The population of disabled elderly in the United States is growing rapidly. The number of Americans who will suffer functional disability due to arthritis, stroke, diabetes, coronary artery disease, cancer, or cognitive
impairment is expected to increase at least 300% by
2049.1
-US dept. of Health and Human Services
The Company
Among Health Care Industry
• 9th in Total Annual Sales ($29.53 billion)
• 8th in Market Cap ($65.93 billion)
• One of the most diversified companies in the
Health Care industry
Business Segments
• Pharmaceuticals
• Vascular
• Diagnostic
• Nutritional
• Diabetes and Other
Diversification
Diversification
• Durable goods
– T5000 Biosensor System
• Used for research, disease surveillance, forensics
• Government agencies like FBI, CDC, university big customers
– Freestyle Lite used for glucose monitoring
• 170 million with diabetes in US alone
• 40 million in India expected to grow
• Biologics – far harder for generics to mimic and manufacture
• Nutritional Products
Biotechnology
• Biotechnology will fuel growth
• Biologics is still one of the bright
• Lucrative new therapies
• Above-average sales and earnings
growth
Asian Power!
• Singapore plant opening
• Products:
infant formula
follow-on formula
growing-up milk
China’s Increasing Medical
Expenditure
How Effective is Your R&D?
Company Abbot J&J PFE Teva Merk Eli Lilly Novartis GSK
Net Income $4880 $12949 $8104 $635 $1768 $958 $2249 $1286
R&D $2699 $7577 $7945 $2188 $1169 $951 $1767 $802
NI/ R&D 1.81 1.71 1.02 0.29 1.51 1.01 1.27 1.60
In $ millions
Key Numbers
Abbot Industry Avg.
Net Sales (2008) $29.6 million $31.9 million
1-Year Sales Growth 13.9% 5.5%
1-Year Net Income Growth 35.3% 9.1%
Profit Margin 16.5% 18.4%
Ratios
Company Mkt. Cap P/E ROE
Abbott
Laboratories
69.1 B 14.30 26.86%
Johnson & Johnson 142.1 B 11.25 30.17%
Pfizer 90 B 11.11 13.10%
Industry Average -- 14.10 21.50%
Product Analysis
Humira
• Abbott’s Gem Product for Rheumatoid Arthritis
• An estimated 46 million Americans affected
• Continually finding new uses for Humira which has
boosted earnings even more
– Crohn’s Disease: 1.4 million Americans affected
– Psoriatic Arthritis
• Combination of strong RA plus new uses will increase
market penetration for years
Humira Sales 04’ - 08’
2007
$3.0b
11.8%
2008
$4.5b
15.3%
2006
$2.0b
9.1%2005
$1.4b
6.3%
2004
$0.85b
4.3%
Xience V
• Drug-eluting heart stent released in mid-2008
• Already a leader with approximately 30% of the
market share: $1.2b revenues in 2008
• Recent research report stated that Xience
performs better over three years than its leading
competitor, Boston Scientific’s Taxus
• Top-selling stent (rapid market penetration)
because of superior quality
Xience V
• $2,000 a piece
• No cost wars
• 1-3 yr contract
• Low cardiac death rate of 0.5% over three
years; Taxus had 3-8x higher death rate
• Xience: major adverse cardiac events 6.4%,
14.9& Taxus (over three years)
Heart Disease in America
• 72 million Americans live every day with some
form of heart disease
• 63% (approx 191 million) of Americans are
overweight with a Body Mass Index (BMI) in
excess of 25.0
• According to Global Industry Analysts, the
market for coronary stents is slated to exceed
$7.2 B by 2012
Pipeline
• Strong late-stage Pipeline
– 9 major regulatory approvals in 2008 and
expecting several this year
• Acquisition of Kos Pharmaceuticals adds
significant growth opportunity to Vascular
Care
• Acquisition of Advanced Medical Optics
Risk
Risks
• Industry-Wide
– Obama healthcare reform
– Generic drug competition
– Patent cliffs
– Difficulty nature of drug innovation
• Company-Specific
– Humira sales
– Patent expiration of Depakote
Valuation